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, 2002 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 outstanding as of December 31, 2002: 43,975,566
BARR LABORATORIES, INC.
INDEX TO FORM 10-Q
PAGE
PART I FINANCIAL INFORMATION NUMBER
------ --------------------- ------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2002 (unaudited) and June 30,
2002....................................................................... 1
Consolidated Statements of Operations for the three and six months ended
December 31, 2002 and 2001 (unaudited)..................................... 2
Consolidated Statements of Cash Flows for the six months ended December 31,
2002 and 2001 (unaudited).................................................. 3
Notes to Consolidated Financial Statements (unaudited)....................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 35
Item 4. Controls and Procedures.......................................................... 35
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 37
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 6. Exhibits and Reports on Form 8-K................................................. 39
Signatures and Rule 13a-14 Certifications........................................ 39
i
BARR LABORATORIES, INC.
Consolidated Balance Sheets
(in thousands, except share amounts)
DECEMBER 31,
2002 JUNE 30,
(UNAUDITED) 2002
------------ ----------
Assets
Current assets:
Cash and cash equivalents $ 405,045 $ 331,257
Marketable securities 9,400 -
Accounts receivable, net 94,577 103,168
Other receivables 24,961 23,230
Inventories 84,773 151,133
Deferred income taxes 18,208 18,208
Prepaid expenses and other current assets 13,146 7,852
---------- ----------
Total current assets 650,110 634,848
Property, plant and equipment, net of accumulated depreciation
of $95,833 and $87,419, respectively 190,157 165,522
Deferred income taxes 21,422 21,270
Marketable securities 15,108 15,502
Patents and product licenses, net 25,460 28,200
Goodwill 14,118 13,941
Other assets 17,655 9,271
---------- ----------
Total assets $ 934,030 $ 888,554
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,327 $ 110,879
Accrued liabilities 53,442 51,438
Current portion of long-term debt 7,029 3,642
Current portion of capital lease obligations 1,529 1,695
Income taxes payable 31,184 9,801
---------- ----------
Total current liabilities 127,511 177,455
Long-term debt 31,429 37,657
Long-term capital lease obligations 4,275 4,977
Other liabilities 3,183 1,933
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 44,162,498 and 43,792,170, respectively 442 438
Additional paid-in capital 308,373 291,637
Retained earnings 459,670 375,066
Accumulated other comprehensive (loss) income (145) 99
---------- ----------
768,340 667,240
Treasury stock, at cost: 186,932 shares (708) (708)
---------- ----------
Total shareholders' equity 767,632 666,532
---------- ----------
Total liabilities and shareholders' equity $ 934,030 $ 888,554
========== ==========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
1
BARR LABORATORIES, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001
-------------- ------------- ------------- -------------
Revenues:
Product sales $ 207,667 $ 360,853 $ 426,383 $ 707,248
Development and other revenue 1,368 5,237 3,080 10,945
-------------- ------------- ------------- -------------
Total revenues 209,035 366,090 429,463 718,193
Costs and expenses:
Cost of sales 94,872 225,682 205,791 429,516
Selling, general and administrative 33,089 31,621 64,401 59,173
Research and development 22,445 17,332 43,583 34,893
Merger-related costs - 30,844 - 30,939
-------------- ------------- ------------- -------------
Earnings from operations 58,629 60,611 115,688 163,672
Proceeds from patent challenge settlement 8,562 7,937 17,125 15,875
Interest income 1,684 2,146 3,181 3,983
Interest expense 473 950 921 2,241
Other expense (income) 280 (2,024) 246 (2,011)
-------------- ------------- ------------- -------------
Earnings before income taxes 68,122 71,768 134,827 183,300
Income tax expense 25,375 29,677 50,223 69,054
-------------- ------------- ------------- -------------
Net earnings 42,747 42,091 84,604 114,246
Preferred stock dividends - - - 457
Deemed dividend on convertible preferred stock - - - 1,493
-------------- ------------- ------------- -------------
Net earnings applicable to common shareholders $ 42,747 $ 42,091 $ 84,604 $ 112,296
============== ============= ============= =============
Earnings per common share $ 0.97 $ 0.98 $ 1.93 $ 2.63
============== ============= ============= =============
Earnings per common share - assuming dilution $ 0.94 $ 0.91 $ 1.85 $ 2.46
============== ============= ============= =============
Weighted average shares 43,922 43,076 43,833 42,759
============== ============= ============= =============
Weighted average shares - assuming dilution 45,696 46,219 45,612 45,573
============== ============= ============= =============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
2
BARR LABORATORIES, INC.
Consolidated Statements of Cash Flows
For the Six Months Ended December 31, 2002 and 2001
(in thousands of dollars)
(unaudited)
2002 2001
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 84,604 $ 114,246
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 10,422 7,355
Deferred income tax benefit - (1,471)
Write-off of intangible asset 1,330 -
Write-off of deferred financing fees associated with early extinguishment of debt - 247
Gain on disposal of property, plant & equipment (457) -
Write-off of investment 250 -
Other (36) 184
Tax benefit of stock incentive plans 10,018 3,411
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net 6,860 (44,340)
Inventories 66,360 24,175
Prepaid expenses (593) (2,368)
Other assets (4,506) 1,021
Increase (decrease) in:
Accounts payable, accrued liabilities and other liabilities (77,999) 115,371
Income taxes payable 21,383 10,356
-------------- -------------
Net cash provided by operating activities 117,636 228,187
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (35,930) (16,490)
Proceeds from sale of property, plant and equipment 2,947 10
Loans to Natural Biologics (4,384) (1,000)
Purchases of marketable securities, net (9,400) -
-------------- -------------
Net cash used in investing activities (46,767) (17,480)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases (3,803) (8,667)
Net payments on line of credit - (20,316)
Purchase of treasury stock - (695)
Proceeds from exercise of stock options and employee stock purchases 6,722 9,378
Other - (61)
-------------- -------------
Net cash provided by (used in) financing activities 2,919 (20,361)
-------------- -------------
Increase in cash and cash equivalents 73,788 190,346
Cash and cash equivalents at beginning of period 331,257 222,343
-------------- -------------
Cash and cash equivalents at end of period $ 405,045 $ 412,689
============== =============
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period:
Interest, net of portion capitalized $ 895 $ 2,304
============== =============
Income taxes $ 18,822 $ 55,771
============== =============
Non-cash transactions:
Equipment under capital lease $ -- $ 5,318
============== =============
See accompanying notes to the consolidated financial statements.
3
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements of Barr Laboratories, Inc.
and subsidiaries ("Barr" or "the Company") are prepared in conformity with
accounting principles generally accepted in the United States. In the
opinion of management, all adjustments necessary for a fair presentation
of the financial position and results of operations for the periods
presented have been included. These unaudited consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ended June 30, 2002,
included in the annual report on Form 10-K filed by the Company with the
Securities and Exchange Commission (the "SEC") on August 26, 2002 and the
quarterly report on Form 10-Q for the three months ended September 30,
2002 filed by the Company with the SEC on November 14, 2002. The
consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany transactions have been eliminated.
Management believes that, along with the following information, the
disclosures are adequate to make the information presented herein not
misleading. Certain prior year amounts have been reclassified to conform
to the current presentation. The results of operations for the three and
six months ended December 31, 2002 may not be indicative of the results to
be expected for the fiscal year ending June 30, 2003.
2. ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and the related notes to the financial statements.
The methods, estimates and judgments the Company uses in applying the
accounting policies most critical to its financial statements have a
significant impact on the results reported in the Company's financial
statements. The SEC has defined the most critical accounting policies as
the ones that are most important to the portrayal of the Company's
financial condition and results, and require the Company to make its most
difficult and subjective judgments. Based on this definition, the
Company's most critical policies include the following: (1) provisions for
estimated sales returns and allowances; (2) accrual of inventory reserves;
(3) deferred taxes; (4) accrual for litigation; (5) accrual for
self-insurance reserve; and (6) the assessment of recoverability of
goodwill and other intangible assets. The Company also has other key
accounting policies, including policies for revenue recognition. The
Company believes that these other policies either do not generally require
it to make estimates and judgments that are as difficult or as subjective
as the six listed above, or it is less likely that they would have a
material impact on the Company's reported results of operations for a
given period. Although the Company believes that its estimates and
assumptions are reasonable, they are based upon information presently
available. Actual results may differ significantly from the Company's
estimates and such estimates could be different using different
assumptions or conditions.
4
The Company summarizes its most critical accounting policies below:
Sales returns and allowances
When the Company recognizes revenue from the sale of its pharmaceutical
products, it simultaneously records an estimate of various costs that
reduce product sales. These costs include estimates for product returns,
rebates, chargebacks and other sales allowances. In addition, as discussed
in detail below, the Company may record allowances for shelf-stock
adjustments when the conditions are appropriate. The Company bases its
estimates for sales allowances such as product returns, rebates and
chargebacks on a variety of factors, including actual return experience of
these or similar products, rebate agreements for each product, and
estimated sales by its wholesale customers to other third parties with
whom the Company has contracts. Actual experience associated with any of
these items may differ materially from the Company's estimates. The
Company reviews the factors that influence its estimates and, if
necessary, makes adjustments when it believes that actual product returns,
credits and other allowances may differ from established reserves.
The Company often issues credits to customers for inventory remaining on
their shelves following a decrease in the market price of a generic
pharmaceutical product. These credits, commonly referred to in the
pharmaceutical industry as "shelf-stock adjustments," can then be used by
customers to offset future amounts owing to the Company under invoices for
future product deliveries. The shelf-stock adjustment is intended to
reduce a customer's inventory cost to better reflect current market prices
and is often used by the Company to maintain its long-term customer
relationships. The determination to grant a shelf-stock credit to a
customer following a price decrease is usually at the Company's discretion
rather than contractually required. The Company records allowances for
shelf-stock adjustments at the time it sells products that it believes
will be subject to a price decrease. When determining whether to record a
shelf-stock adjustment and the amount of any such adjustment, the Company
analyzes several variables including the estimated launch date of a
competing product, the estimated decline in market price and estimated
levels of inventory held by the customer at the time of the decrease in
market price. As a result, a shelf-stock reserve depends on a product's
unique facts and circumstances. The Company regularly monitors these and
other factors for its significant products and evaluates its reserves and
estimates as additional information becomes available.
Accounts receivable are presented net of allowances relating to the above
provisions of $112,367 and $93,789 at December 31, 2002 and June 30, 2002,
respectively.
Inventory reserves
The Company establishes reserves for its inventory to reflect situations
in which the cost of the inventory is not expected to be recovered. The
Company regularly reviews such circumstances, including when product is
close to expiration and is not expected to be sold, when product has
reached its expiration date, or when a batch of product is not expected to
be saleable based on the Company's quality assurance standards. The
reserve for these products is equal to all or a portion of the cost of the
inventory based on the specific facts and circumstances. In evaluating
whether inventory is stated at the lower of cost or market,
5
management considers such factors as the amount of inventory on hand,
estimated time required to sell such inventory, remaining shelf life and
current and expected market conditions, including levels of competition.
The Company monitors inventory levels, expiry dates and market conditions
on a regular basis. The Company records changes in inventory reserves as
part of cost of goods sold.
Deferred taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under this
method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the
financial statement and tax basis of assets and liabilities using enacted
tax rates in effect for the years in which the differences are expected to
reverse. A valuation allowance is provided for the portion of deferred tax
assets which are "more-likely-than-not" to be unrealized. The
recoverability of deferred tax assets is dependent upon the Company's
assessment of whether it is more-likely-than-not that sufficient future
taxable income will be generated in the relevant tax jurisdiction to
utilize the deferred tax asset. The Company reviews its internal
forecasted sales and pre-tax earnings estimates to make its assessment
about the utilization of deferred tax assets. In the event the Company
determines that future taxable income will not be sufficient to utilize
the deferred tax asset, a valuation allowance will be recorded. If that
assessment changes, a charge or a benefit would be recorded on the
statement of operations.
Litigation
The Company is subject to litigation in the ordinary course of business
and also to certain other contingencies (See Note 14). Legal fees and
other expenses related to litigation and contingencies are recorded as
incurred. Additionally, the Company assesses, in consultation with its
counsel, the need to record a liability for litigation and contingencies
on a case-by-case basis. Reserves are recorded when the Company, in
consultation with counsel, determines that a loss related to a matter is
both probable and reasonably estimable.
Self-insurance reserve
Since September 30, 2002, the Company has been primarily self-insured for
product liability claims. The Company records a self-insurance reserve for
each recorded claim on a case-by-case basis, plus an allowance for the
cost of incurred but not reported ("IBNR") claims. In assessing the
amounts to record for each reported claim, management, in consultation
with counsel and its insurance consultants, considers the nature and
amount of the claim, the Company's prior experience with similar claims,
and whether the amount expected to be paid on a claim is both probable and
reasonably estimable. In determining the allowance for the cost of IBNR
claims, management considers a variety of factors including historical
claims and insurance premium experience. The Company believes that the
amount estimated and recorded for IBNR claims is reasonable, considering
its limited history as a self-insured entity and the fact that it has
never incurred a significant product liability loss. Actual payments may
differ from the reserve amount. As of and for the three months ended
December 31, 2002, the liability and related expenses for the Company's
6
self-insurance reserve were included in accrued liabilities and selling,
general and administrative expenses, respectively.
Goodwill and intangible assets
In connection with acquisitions, the Company determines the amounts
assigned to goodwill and intangibles based on purchase price allocations.
These allocations, including an assessment of the estimated useful lives
of intangible assets, have been performed by qualified independent
appraisers using generally accepted valuation methodologies. Valuation of
intangible assets is generally based on the estimated cash flows related
to those assets, while the value assigned to goodwill is the residual of
the purchase price over the fair value of all identifiable assets acquired
and liabilities assumed. Useful lives are determined based on the expected
future period of benefit of the asset, which considers various
characteristics of the asset, including historical cash flows. As required
by SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), the
Company reviews goodwill for impairment annually or more frequently if
impairment indicators arise.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Goodwill and Other Intangible Assets
In July 2001, the FASB issued SFAS 142, which supercedes APB opinion No.
17, "Intangible Assets." Under SFAS 142, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed for impairment
annually, or more frequently if impairment indicators arise. The
provisions of SFAS 142 are effective for fiscal years beginning after
December 15, 2001.
The Company adopted SFAS 142 on July 1, 2002. SFAS 142 requires goodwill
to be tested for impairment annually using a two-step process to determine
the amount of impairment, if any, which is then written-off. The first
step is to identify potential impairment, which is measured as of the
beginning of the fiscal year. To accomplish this, the Company will
identify its reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units. Under
SFAS 142, to the extent a reporting unit's carrying amount exceeds its
fair value, an indication exists that the reporting unit's goodwill may be
impaired. The second step of the goodwill impairment test, if required,
measures the amount of the impairment loss (measured as of the beginning
of the year of adoption), if any. During the quarter ended December 31,
2002, the Company completed the first step of this process and determined
there was no indication of goodwill impairment.
Accounting for Stock Based Compensation
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition Disclosure, An Amendment of FASB Statement No.
123" ("SFAS 148"). This statement provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee
7
compensation. In addition, SFAS 148 amends the disclosure requirements of
Statement No. 123 to require more prominent and more frequent disclosures
in financial statements about the effects of stock-based compensation. The
provisions of SFAS 148 are effective for fiscal years ending after
December 15, 2002 and the interim disclosure provisions are effective for
financial reports containing financial statements for interim periods
beginning after December 15, 2002. The Company will adopt SFAS 148 for the
fiscal quarter ending March 31, 2003. The Company believes that the
adoption of SFAS 148 will not have a material impact on its results of
operations or financial position.
4. 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, 2002 and June 30, 2002, approximately $566 and $84,834,
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 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 payable balance for Tamoxifen purchased by
the Company from AstraZeneca. On August 21, 2002, the Company's supply
agreement with AstraZeneca expired. Since the expiration of the agreement,
the Company has not ordered additional Tamoxifen product and no additional
amounts have been deposited in the escrow account.
5. OTHER RECEIVABLES
Other receivables consist primarily of patent challenge settlement
receivables and receivables related to development and other revenue (See
Note 10).
6. INVENTORIES
Inventories consist of the following:
December 31, June 30,
2002 2002
------------ ----------
Raw materials and supplies $ 47,394 $ 43,952
Work-in-process 14,706 12,897
Finished goods 22,673 94,284
------------ ----------
Total $ 84,773 $ 151,133
============ ==========
8
The Company's distributed version of Tamoxifen Citrate, purchased as a
finished product from AstraZeneca, accounted for approximately $0 and
$69,655 of finished goods inventory as of December 31, 2002 and June 30,
2002, respectively. The December 31, 2002 finished goods balance reflects
reduced Tamoxifen inventory levels as the result of the expiration of the
Company's supply agreement with AstraZeneca on August 21, 2002 (See Note
4).
7. RELATED PARTIES
Dr. Bernard C. Sherman
During the three months ended December 31, 2002 and 2001, the Company
purchased $1,766 and $383, respectively, of bulk pharmaceutical materials
from companies affiliated with Dr. Bernard C. Sherman, the Company's
largest beneficial shareholder and a former member of the Board of
Directors. For the six months ended December 31, 2002 and 2001, such
purchases were $2,678 and $1,508, respectively. In addition, during the
three months ended December 31, 2002 and 2001, the Company sold $2,443 and
$5,494, respectively, of certain of its pharmaceutical products and bulk
pharmaceutical materials to companies owned by Dr. Sherman. For the six
months ended December 31, 2002 and 2001, such sales were $5,312 and
$10,320, respectively. As of December 31, 2002, the Company's accounts
receivable included $1,135 due as a result of these sales.
During fiscal 1996, the Company entered into an agreement with a company
owned by Dr. Sherman to share litigation and related costs in connection
with the Company's Fluoxetine patent challenge. For the three months ended
December 31, 2002 and 2001, the Company recorded $195 and $300,
respectively, in connection with this agreement as a reduction to
operating expenses. For the six months ended December 31, 2002 and 2001,
the Company recorded $330 and $897, respectively, as a reduction to
operating expenses. Included in cost of sales for the three months ended
December 31, 2002 and 2001 is approximately $262 and $65,525,
respectively, for the related party's share of Fluoxetine profits as
defined in the profit sharing agreement. For the six months ended December
31, 2002 and 2001, the Company recorded $650 and $150,221, respectively,
as cost of sales related to this agreement.
As of December 31, 2002 and June 30, 2001, the Company's accounts payable
included $2,217 and $634, respectively, related to these transactions.
8. INTANGIBLE ASSETS
Goodwill of $14,118 and $13,941 at December 31, 2002 and June 30, 2002,
respectively, was attributable to the Company's acquisition of certain
assets and assumption of certain liabilities of Enhance Pharmaceuticals,
Inc. in June 2002. The change in goodwill from June 30, 2002 was
attributable to acquisition related professional fees for which invoices
were received subsequent to June 30, 2002.
9
Intangible assets, excluding goodwill, which are comprised primarily of
patents and product licenses, consist of the following:
December 31, June 30,
2002 2002
------------ --------
Patents $ -- $ 1,400
Product licenses 26,800 26,800
-------- --------
26,800 28,200
Less: accumulated amortization (1,340) --
-------- --------
Intangible assets, net $ 25,460 $ 28,200
======== ========
During December 2002, the Company's management decided to suspend
development of a product for which $1,400 in patents had been recorded,
pending review of future market opportunities. As a result, on December
31, 2002, the Company wrote-off the remaining $1,330 of patents, net of
accumulated amortization. For the three and six months ended December 31,
2002, this amount has been included in selling, general and administrative
expense.
Estimated amortization expense on product licenses is as follows:
Year Ending
June 30,
-----------
2003 $2,750
2004 2,680
2005 2,680
2006 2,680
2007 2,680
The Company's current product licenses have a weighted average useful life
of approximately ten years.
9. LONG-TERM DEBT
The Company has a $40,000 revolving credit facility that expires on
February 27, 2005. As of December 31, 2002, there was approximately
$29,312 available to the Company under this facility due to the issuance
of a $10,688 letter of credit in support of the Company's product
liability insurance (See Note 14).
10. DEVELOPMENT AND OTHER REVENUE
For the three and six months ended December 31, 2001, development and
other revenue consisted primarily of amounts received from DuPont
Pharmaceuticals Company ("DuPont") for various development and
co-marketing agreements entered into in March 2000. The assets of DuPont
have since been acquired by Bristol-Myers Squibb ("BMS")
10
and the March 2000 agreements that generated these revenues were
terminated in April 2002.
For the three and six months ended December 31, 2002, development and
other revenue includes royalty income earned under licensing agreements, a
development agreement with the U.S. Department of Defense, and a
development agreement related to the Company's vaginal ring products.
11. MERGER-RELATED COSTS
As a result of the acquisition of Duramed Pharmaceuticals, Inc. in October
2001 (accounted for as a pooling of interests), the Company incurred net
pre-tax merger-related expenses of approximately $31,000 nearly all of
which was included in the consolidated statements of operations as
merger-related costs. These costs include direct transaction costs such as
legal, accounting and other expenses; costs associated with facility and
product rationalization; and severance costs. As of December 31, 2002, the
remaining liability of approximately $1,219 consists primarily of facility
rationalization costs.
12. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators used
to calculate earnings per common share ("EPS") in the Consolidated
Statements of Operations:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net earnings $ 42,747 $ 42,091 $ 84,604 $114,246
Preferred stock dividends -- -- -- 457
Deemed dividend on convertible preferred stock -- -- -- 1,493
-------- -------- -------- --------
Numerator for basic and diluted earnings per share-
net earnings applicable to common shareholders $ 42,747 $ 42,091 $ 84,604 $112,296
======== ======== ======== ========
EARNINGS PER COMMON SHARE - BASIC:
Weighted average shares (denominator) 43,922 43,076 43,833 42,759
Net earnings applicable to common shareholders $ 0.97 $ 0.98 $ 1.93 $ 2.63
======== ======== ======== ========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Weighted average shares 43,922 43,076 43,833 42,759
Effect of dilutive options 1,774 3,143 1,779 2,814
-------- -------- -------- --------
Weighted average shares - assuming
dilution (denominator) 45,696 46,219 45,612 45,573
Net earnings applicable to common shareholders $ 0.94 $ 0.91 $ 1.85 $ 2.46
======== ======== ======== ========
11
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -----------------
2002 2001 2002 2001
----- ----- ----- -----
Not included in the calculation of diluted earnings per share because their
impact is antidilutive:
Stock options outstanding 840 519 844 519
Preferred if converted -- -- -- 1,013
13. 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
SFAS No. 115 purposes as "available for sale." Total comprehensive income
for the three months ended December 31, 2002 and 2001 was $42,558 and
$42,070, respectively, and for the six months ended December 31, 2002 and
2001 was $84,360 and $112,205, respectively.
14. COMMITMENTS AND CONTINGENCIES
Business Development Venture
In fiscal 2002, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Natural Biologics, the raw material supplier
for the Company's generic conjugated estrogens product. The Company
believes that the raw material is pharmaceutically equivalent to raw
material used to produce Wyeth's Premarin(R). Natural Biologics is a
defendant in litigation brought by Wyeth alleging that Natural Biologics
misappropriated certain Wyeth trade secrets with respect to the
preparation of this raw material. This case was tried in November 2002,
and a decision may be rendered by the trial court at any time. An
unfavorable decision for Natural Biologics could materially and adversely
affect Natural Biologics' ability to repay the loans the Company has made
to it. If that were to be the case, the Company may be required to
write-off all or a portion of the loans made to Natural Biologics. As of
December 31, 2002, the Company had loaned Natural Biologics approximately
$9,320 under this agreement, and has included such amount in other assets.
Under the terms of the Loan Agreement, absent the occurrence of a material
adverse event (including, without limitation, an unfavorable court
decision in the Wyeth matter), the Company could loan Natural Biologics up
to $35,000 over a three-year period, including an additional $4,580 during
the remainder of fiscal 2003, and $8,300 and $2,800 during fiscal 2004 and
2005, respectively. The Loan Agreement also provides for a loan of $10,000
based upon the successful outcome of pending legal proceedings between
Wyeth and Natural Biologics, as discussed above. The loans mature on June
3, 2007.
In fiscal 2002, the Company also entered into a Development, Manufacturing
and Distribution Agreement with Natural Biologics which could obligate the
Company to make
12
milestone payments totaling an additional $35,000 to Natural Biologics
based on achieving certain legal and product approval milestones,
including the approval of a generic product.
Funding of Employee Savings Plan
On September 27, 2002, the Company committed to make a minimum aggregate
contribution of $9,200 to the Barr Laboratories, Inc. Savings and
Retirement Plan for the fiscal year ending June 30, 2003. As of December
31, 2002, the Company has funded $4,500 of the contribution commitment and
has recorded an asset and a matching liability equal to the remaining
contribution commitment.
Employment Agreements
The Company has entered into employment agreements with certain key
employees. These agreements mature at various dates through 2005.
Product Liability Insurance
Due to the significant increase in the cost of product liability
insurance, on September 30, 2002, the Company entered into a finite risk
insurance arrangement (the "Arrangement") with a third party insurer. The
Company believes that the Arrangement is an effective way to insure
against a portion of potential product liability claims. In exchange for
$15,000 in product liability coverage over a five-year term, the
Arrangement provides for the Company to pay approximately $14,250 in four
equal annual installments of $3,563 beginning in October 2002. Included in
the initial payment is an insurer's margin of approximately $1,000, which
will be amortized over the five-year term. At any six-month interval, the
Company may, at its option, cancel the Arrangement. In addition, at the
earlier of termination or expiry, the Company is eligible for a return of
all amounts paid to the insurer, less the insurer's margin and amounts for
any incurred claims. The Company is recording the payments, net of the
insurer's margin, as deposits included in other assets.
The Company continues to be self-insured for potential product liability
claims between $15,000 and $25,000. The Company has purchased additional
coverage from an insurance carrier for product liability claims related to
certain products from $25,000 to $50,000.
No significant product liability claim has ever been paid by the Company.
However, if a claim was filed and the Company was not successful in the
defense of the suit, it could have a material adverse effect on the
business and financial condition of the Company to the extent any loss
from such judgment was self-insured or exceeded policy limits.
Litigation Settlement
On October 22, 1999, the Company reached a settlement agreement with
Schein Pharmaceutical, Inc. (now part of Watson Pharmaceuticals, Inc.)
relating to a 1992 agreement regarding the pursuit of a generic conjugated
estrogens product. Under the terms of the settlement, Schein relinquished
any claim to rights in Cenestin in exchange for a payment of $15,000,
which the Company paid to Schein in 1999. An additional $15,000 payment is
required under the terms of the settlement if Cenestin achieves total
profits
13
(product sales less product-specific cost of goods sold, sales and
marketing and other relevant expenses) of greater than $100,000 over any
five-year or less period prior to October 22, 2014.
Class Action Lawsuits
Ciprofloxacin (Cipro(R))
To date, the Company has been named as co-defendants with Bayer
Corporation, The Rugby Group, Inc. and others in 38 class action
complaints filed in state and federal courts by direct and indirect
purchasers of Ciprofloxacin (Cipro(R)) since 1997. 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. A prior investigation of this agreement by the Texas
Attorney General's Office on behalf of a group of state Attorneys General
was closed without further action in December 2001.
Tamoxifen
To date, approximately 33 consumer or third party payor class action
complaints have been filed in state and federal courts 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 violates the antitrust laws,
insulates Zeneca, Inc. and the Company from generic competition and
enables Zeneca, Inc. and the Company to charge artificially inflated
prices for Tamoxifen Citrate. A prior investigation of this agreement by
the U.S. Department of Justice was closed without further action.
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 judgment 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. and Apothecon, Inc.,
respectively, both of which have since been acquired by Geneva
Pharmaceuticals, Inc., which is a subsidiary of Novartis AG, 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. On May 10, 2002,
the District Court granted summary judgment in the Company's favor on all
antitrust claims in the case, but found that the plaintiffs could proceed
to trial on their allegations that the Company interfered with an alleged
raw material supply contract between Invamed and Barr's raw material
supplier. A trial on these allegations has been set for March 17, 2003.
The Company believes that these suits are without merit and intends to
vigorously defend its position, but an adverse
14
judgment could have a material impact on the Company's consolidated
financial statements.
Desogestrel/Ethinyl Estradiol Suit
In May 2000, the Company filed an Abbreviated New Drug Application
("ANDA") seeking approval from the FDA to market the tablet combination of
desogestrel/ethinyl estradiol tablets and ethinyl estradiol tablets, the
generic equivalent of Organon Inc.'s Mircette(R) oral contraceptive
regimen. The Company notified Bio-Technology General Corp. ("BTG"), the
owner of the patent for the Mircette product, pursuant to the provisions
of the Hatch-Waxman Act and BTG filed a patent infringement action in the
United States District Court for the District of New Jersey seeking to
prevent Barr from marketing the tablet combination. On December 17, 2001,
the United States District Court for the District of New Jersey granted
summary judgment in favor of Barr, finding that Barr's product did not
infringe the patent at issue in the case. Subsequently, the patent holder
filed an appeal of the lower court's ruling. On April 8, 2002, the FDA
granted final approval for Barr's application and Barr launched its
product. If the patent holder's appeal is successful, the Company could be
liable for damages for patent infringement, which could have a material
adverse impact on the Company's consolidated financial statements.
Adderall Trade Dress Infringement Suit
On May 1, 2002, Shire Richwood Inc. ("Shire") filed a lawsuit in the
United States District Court for the District of New Jersey against Barr
claiming that Barr's Dextro Salt Combo product uses trade dress that is
unlawfully similar in appearance to that of Shire's Adderall(R) product.
The Company believes that this lawsuit is without merit. Shire sought a
preliminary injunction to restrain Barr from using the trade dress and to
have Barr recall from the marketplace any product sold in such trade
dress. On August 29, 2002, the District Court issued an order denying
Shire's request for a preliminary injunction, which Shire has appealed.
The Company does not expect the on-going litigation to cause any
disruption in the manufacturing and sale of its Dextro Salt Combo product
or to affect the status of product currently in the marketplace. However,
if Shire is successful on appeal and an injunction is granted or damages
are awarded, it could have a material adverse impact on the Company's
consolidated financial statements.
Termination of Solvay Co-Marketing Relationship
On March 31, 2002, the Company gave notice of its intention to terminate
on June 30, 2002 the relationship between the Company and Solvay
Pharmaceuticals, Inc. ("Solvay") which covered the joint promotion of the
Company's Cenestin(R) tablets and Solvay's Prometrium(R) capsules. Solvay
has disputed the Company's right to terminate the relationship, claims it
is entitled to substantial damages and has notified the Company that it
has demanded arbitration of this matter. The Company believes its actions
are well founded, but if the Company is incorrect, the matter could have a
material adverse impact on the Company's consolidated financial
statements.
15
Lemelson
On November 23, 2001, the Lemelson Medical, Education & Research
Foundation, LP filed an action in the United States District Court for the
District of Arizona alleging patent infringement against many defendants,
including the Company, involving "machine vision" or "computer image
analysis." On March 20, 2002, the court stayed the proceedings, pending
the resolution of another suit that involves the same patents, but does
not involve the Company. If Lemelson prevails in its action against the
Company, it could have a material adverse impact on the Company's
consolidated financial statements.
Other Litigation
As of December 31, 2002, the Company was involved with other lawsuits
incidental to its business, including patent infringement actions and
product liability claims. Management, based on the advice of legal
counsel, believes that the ultimate disposition of such other lawsuits
will not have a material adverse effect on the Company's consolidated
financial statements.
Administrative Matters
On June 30, 1999, the Company received a civil investigative demand
("CID") and a subpoena from the FTC seeking documents and data relating to
the January 1997 agreements resolving the patent litigation involving
Ciprofloxacin hydrochloride, which had been pending in the U.S. District
Court for the Southern District of New York. The CID was limited to a
request for information and did not allege any wrongdoing. The FTC is
investigating whether the Company, through the settlement and supply
agreements, has engaged in activities in violation of the antitrust laws.
The Company continues to cooperate with the FTC in this investigation.
On August 17, 2001, the Oregon Attorney General's Office, as liaison on
behalf of a group of state Attorneys General, served the Company with a
civil investigative demand relating to its investigation of the Company's
settlement of the Tamoxifen patent challenge with AstraZeneca. The
investigative demand requests the production of certain information and
documents that may assist the Attorney General in its investigation. The
Company is reviewing the demand and intends to fully cooperate with the
Attorney General's office in its investigation.
The Company's patent challenge settlement agreements relating to
Ciprofloxacin and Tamoxifen have been the subject of investigations by
state and federal antitrust enforcement agencies: the Texas Attorney
General initiated, and closed, an investigation into the Ciprofloxacin
settlement on behalf of several state Attorneys General; and the U.S.
Department of Justice initiated, and closed, an investigation into the
Tamoxifen settlement. The two investigations discussed in the paragraphs
above remain open.
The Company believes that the patent challenge settlements being
investigated represent a pro-consumer and pro-competitive outcome to the
patent challenge cases. The Company believes that once all the facts are
considered, and the benefits to consumers are assessed, these
investigations will be satisfactorily resolved as they have been by the
DOJ, regarding
16
Tamoxifen, and the Texas Attorney General, regarding Ciprofloxacin.
However, consideration of these matters could take considerable time, and
any adverse judgment could have a material adverse impact on the Company's
consolidated financial statements.
In May 2001, the Company received a subpoena, issued by the Commonwealth
of Massachusetts Office of the Attorney General, for the production of
documents related to pricing and Medicaid reimbursement of select products
in Massachusetts. The Company is one of a number of pharmaceutical
companies that have received such subpoenas. The Company is cooperating
with the inquiry and believes that all of its product agreements and
pricing decisions have been lawful and proper.
17
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands)
FORWARD-LOOKING STATEMENTS
The following sections contain a number of forward-looking statements. To the
extent that any statements made in this report contain information that is not
historical, these statements are essentially forward-looking. Forward-looking
statements can be identified by their use of words such as "expects," "plans,"
"will," "may," "anticipates," "believes," "should," "intends," "estimates" and
other words of similar meaning. These statements 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 difficulty in predicting the timing and outcome of legal
proceedings, including patent related matters like patent challenge
settlements and patent infringement cases;
- the difficulty of predicting the timing of U.S. Food and Drug
Administration, or FDA, approvals;
- court and FDA decisions on exclusivity periods;
- the ability of competitors to extend exclusivity periods for their
products;
- market and customer acceptance and demand for our pharmaceutical
products;
- reimbursement policies of third party payors;
- our ability to market our proprietary products;
- the successful integration of acquired businesses and products into
our operations;
- the use of estimates in the preparation of our financial statements;
- the impact of competitive products and pricing;
- the ability to develop and launch new products on a timely basis;
- the availability of raw materials;
- the availability of any product we purchase and sell as a
distributor;
- the regulatory environment;
- fluctuations in operating results, due to spending for research and
development, sales and marketing and patent challenge activities;
and
- other risks detailed from time-to-time in our filings with the
Securities and Exchange Commission.
18
OVERVIEW
We operate in one business segment, which is the development, manufacture and
marketing of pharmaceutical products.
CRITICAL ACCOUNTING POLICIES
The methods, estimates and judgments we use in applying the accounting policies
most critical to our financial statements have a significant impact on the
results we report in our financial statements. The SEC has defined the most
critical accounting policies as the ones that are most important to the
portrayal of our financial condition and results, and require us to make our
most difficult and subjective judgments. Based on this definition, our most
critical policies include the following: (1) provisions for estimated sales
returns and allowances; (2) accrual of inventory reserves; (3) deferred taxes;
(4) accrual for litigation; (5) accrual for self-insurance reserve; and (6) the
assessment of recoverability of goodwill and other intangible assets. We also
have other key accounting policies including policies for revenue recognition.
We believe that these other policies either do not generally require us to make
estimates and judgments that are as difficult or as subjective as the six listed
above, or it is less likely that they would have a material impact on our
reported results of operations for a given period. Although we believe that our
estimates and assumptions are reasonable, they are based upon information
presently available. Actual results may differ significantly from our estimates
and our estimates could be different using different assumptions or conditions.
Our critical accounting polices are as follows:
Sales Returns and Allowances
When we recognize revenue from the sale of our pharmaceutical products, we
simultaneously record an estimate of various costs which reduce product sales.
These costs include estimates for product returns, rebates, chargebacks and
other sales allowances. In addition, as discussed in detail below, we may record
allowances for shelf-stock adjustments when the conditions are appropriate. We
base our estimates for sales allowances such as product returns, rebates and
chargebacks on a variety of factors, including actual return experience of these
or similar products, rebate agreements for each product, and estimated sales by
our wholesale customers to other third parties who have contracts with us.
Actual experience associated with any of these items may differ materially from
our estimates. We review the factors that influence our estimates and, if
necessary, make adjustments when we believe actual product returns, credits and
other allowances may differ from established reserves.
We often issue credits to customers for inventory remaining on their shelves
following a decrease in the market price of a generic pharmaceutical product.
These credits, commonly referred to in the pharmaceutical industry as
"shelf-stock adjustments," can then be used by customers to offset future
amounts owing to us under invoices for future product deliveries. The
shelf-stock adjustment is intended to reduce a customer's inventory cost to
better reflect current market prices and is often used by us to maintain our
long-term customer relationships. The determination to grant a shelf-stock
credit to a customer following a price decrease is usually at our discretion
rather than contractually required. We record allowances for shelf-stock
adjustments at the time we sell products that we believe will be subject to a
price decrease.
19
When determining whether to record a shelf-stock adjustment and the amount of
any such adjustment, we analyze several variables including the estimated launch
date of a competing product, the estimated decline in market price and estimated
levels of inventory held by the customer at the time of the decrease in market
price. As a result, a shelf-stock reserve depends on a product's unique facts
and circumstances. We regularly monitor these and other factors for our
significant products and evaluate our reserves and estimates as additional
information becomes available.
Inventory Reserves
We establish reserves for our inventory to reflect situations in which the cost
of the inventory is not expected to be recovered. We regularly review such
circumstances, including when product is close to expiration and is not expected
to be sold, when product has reached its expiration date, or when a batch of
product is not expected to be saleable based on our quality assurance standards.
The reserve for these products is equal to all or a portion of the cost of the
inventory based on the specific facts and circumstances. In evaluating whether
inventory is stated at the lower of cost or market, we consider such factors as
the amount of inventory on hand, estimated time required to sell such inventory,
remaining shelf life and current and expected market conditions, including
levels of competition. We monitor inventory levels, expiry dates and market
conditions on a regular basis. We record changes in inventory reserves as part
of cost of goods sold.
Deferred Taxes
Income taxes are accounted for under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred tax
assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided for the
portion of deferred tax assets which are "more-likely-than-not" to be
unrealized. The recoverability of deferred tax assets is dependent upon our
assessment of whether it is more-likely-than-not that sufficient future taxable
income will be generated in the relevant tax jurisdiction to utilize the
deferred tax asset. We review our internal forecasted sales and pre-tax earnings
estimates to make our assessment about the utilization of deferred tax assets.
In the event we determine that future taxable income will not be sufficient to
utilize the deferred tax asset, a valuation allowance will be recorded. If that
assessment changes, a charge or a benefit would be recorded on the statement of
operations.
Litigation
We are subject to litigation in the ordinary course of business and also to
certain other contingencies (See Note 14 to the Consolidated Financial
Statements). Legal fees and other expenses related to litigation and
contingencies are recorded as incurred. Additionally, we assess, in consultation
with counsel, the need to record a liability for litigation and contingencies on
a case-by-case basis. Reserves are recorded when we, in consultation with
counsel, determine that a loss related to a matter is both probable and
reasonably estimable.
20
Self-Insurance Reserve
Since September 30, 2002, we have primarily been self-insured for product
liability claims. We record a self-insurance reserve for each recorded claim on
a case-by-case basis, plus an allowance for the cost of incurred but not
reported ("IBNR") claims. In assessing the amounts to record for each reported
claim, management, in consultation with counsel and our insurance consultants,
considers the nature and amount of the claim, our prior experience with similar
claims, and whether the amount expected to be paid on a claim is both probable
and reasonably estimable. In determining the allowance for the cost of IBNR
claims, management considers a variety of factors including historical claims
and insurance premium experience. We believe that the amount estimated and
recorded for IBNR claims is reasonable, considering our limited history as a
self-insured entity and the fact that we have never incurred a significant
product liability loss. Actual payments may differ from the reserve amount. As
of and for the three months ended December 31, 2002, the liability and related
expenses for our self-insurance reserve were included in accrued liabilities and
selling, general and administrative expenses, respectively.
Goodwill and Intangible Assets
In connection with acquisitions, we determine the amounts assigned to goodwill
and intangibles based on purchase price allocations. These allocations,
including an assessment of the estimated useful lives of intangible assets, have
been performed by qualified independent appraisers using generally accepted
valuation methodologies. Valuation of intangible assets is generally based on
the estimated cash flows related to those assets, while the value assigned to
goodwill is the residual of the purchase price over the fair value of all
identifiable assets acquired and liabilities assumed. Useful lives are
determined based on the expected future period of benefit of the asset, which
considers various characteristics of the asset, including historical cash flows.
As required by SFAS 142 "Goodwill and Other Intangible Assets," we review
goodwill for impairment annually or more frequently if impairment indicators
arise.
As the result of the June 2002 purchase of certain assets and assumption of
certain liabilities of Enhance Pharmaceuticals, Inc., we have approximately
$14,118 of goodwill and $25,460 of intangible assets, net, included in our
balance sheet as of December 31, 2002.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
Revenues -- Overview
Total revenues for the three months ended December 31, 2002 were $209,035, a
decrease of 43% compared to $366,090 for the three months ended December 31,
2001. This decrease in total revenues was anticipated and primarily was due to
the sharp decline in sales of our 20 mg Fluoxetine product, and a decrease in
sales of Tamoxifen. Partially offsetting the decline in sales of Fluoxetine and
Tamoxifen was a 93% increase in sales of other products, led by higher sales of
our oral contraceptive franchise of products and sales of our Dextroamphetamine
products which we launched in February 2002.
21
Revenues -- Product Sales
Sales of products other than Fluoxetine and Tamoxifen increased 93% from $87,902
for the three months ended December 31, 2001 to $169,520 for the three months
ended December 31, 2002. The increase was primarily attributable to increased
sales of our oral contraceptive products, for which sales more than quadrupled
from the prior year quarter, and sales of our Dextroamphetamine products which
we launched in February 2002. Sales of oral contraceptives increased 467% from
the three months ended December 31, 2001 to the three months ended December 31,
2002. The increase in sales of the oral contraceptives reflects higher sales of
existing products, including our Apri(R), Aviane(TM) and Nortrel(R)
products, and sales of our new oral contraceptive products, including
Camila(TM), Cryselle(TM), Enpresse(TM), Lessina(TM), Kariva(TM),
Portia(TM) and Sprintec(TM), all of which we launched in the last twelve
months.
In August 2001, we launched our Fluoxetine 20 mg capsule with 180 days of
exclusivity as the only generic manufacturer. Sales of Fluoxetine were $136,086
for the three months ended December 31, 2001, constituting approximately 38% of
product sales in that quarter. On January 29, 2002, our 180-day generic
exclusivity period on the Fluoxetine 20 mg capsules ended and, as expected, the
FDA approved several other generic versions. As a result, the selling price
declined dramatically and we lost market share to competing products, causing
our sales and profits from Fluoxetine to be substantially lower than those
earned during the exclusivity period. For the three months ended December 31,
2002, sales of Fluoxetine dropped to less than 1% of product sales.
Tamoxifen sales decreased 73% from $136,865 for the three months ended December
31, 2001 to $36,549 for the three months ended December 31, 2002. During the
quarter ended December 31, 2002, we sold all remaining distributed Tamoxifen
inventory previously purchased from AstraZeneca. Our Tamoxifen inventory had
been declining during the quarter due to the expiration of our supply agreement
with AstraZeneca in August 2002 and based on our belief that we would launch our
manufactured version of Tamoxifen 10 mg. In December 2002, the U.S. District
Court for the District of Columbia denied our motion for summary judgment
seeking to enjoin the FDA from withdrawing final agency approval of our
Tamoxifen 10 mg ANDA. We had sought to re-affirm the April 1987 FDA final
approval of our Tamoxifen product, which would have enabled us to launch our
manufactured Tamoxifen 10 mg product during AstraZeneca's pediatric exclusivity
for its Nolvadex(R) brand version of Tamoxifen, which ends on February 20,
2003. Given the court's ruling we were unable to supply Tamoxifen to our
customers after the depletion of our inventory and will be unable to launch our
manufactured Tamoxifen product until February 20, 2003.
Revenues -- Development and Other Revenue
For the three months ended December 31, 2002, development and other revenue of
$1,368 includes royalty income earned under licensing agreements with third
parties, our development agreement with the U.S. Department of Defense, and our
development agreement related to one of our vaginal ring products. For the three
months ended December 31, 2001, development and other revenue consisted
primarily of amounts received from DuPont Pharmaceuticals Company for various
development and co-marketing agreements entered into in March 2000. The assets
of DuPont have since been acquired by Bristol-Myers Squibb ("BMS") and the March
2000 agreements that generated these revenues ended in April 2002. As we
incurred research and other development activity costs, we recorded such
expenses as research and development and
22
invoiced and recorded the related revenue from BMS as development and other
revenue. We recorded revenue from these agreements of $5,000 for the three
months ended December 31, 2001.
Cost of Sales
Cost of sales decreased 58% from $225,682 for the three months ended December
31, 2001 to $94,872 for the three months ended December 31, 2002, primarily due
to lower sales of Fluoxetine and Tamoxifen. Cost of sales includes the profit
split paid to Apotex, Inc., our partner in the Fluoxetine patent challenge and
royalties on certain other products paid to certain of our raw material
suppliers.
As a percentage of product sales, cost of sales decreased from 63% for the three
months ended December 31, 2001 to 46% for the three months ended December 31,
2002. This decrease was attributable to the significant decreases in sales of
Fluoxetine and Tamoxifen for which margins are generally lower than the average
earned on our other products. In addition, the decrease reflects an improved
product mix from a margin perspective, as higher-margin products such as our
oral contraceptives, and our Dextroamphetamine products, made up a larger
percentage of our sales than lower-margin products.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 5% from $31,621 for the
three months ended December 31, 2001 to $33,089 for the three months ended
December 31, 2002. The increase was primarily due to higher marketing expenses
for pre-launch activities related to our extended regimen oral contraceptive,
SEASONALE(R), and increased consulting costs primarily associated with
various information technology projects. Also contributing to the increase were
the amortization of intangible assets and $1,330 for the write-off of intangible
assets for a product that we suspended development of pending review of future
market opportunities. Partially offsetting these increases were decreases in
Cenestin sales and marketing costs due to the termination of our co-promotion
and marketing agreement with Solvay, lower legal costs, and lower headcount
costs associated with synergies achieved as a result of the integration of
Duramed.
Research and Development
Research and development expenses increased 30% from $17,332 for the three
months ended December 31, 2001 to $22,445 for the three months ended December
31, 2002. The increase reflected higher spending because of increased clinical
study activity and headcount costs in our proprietary development program,
including costs associated with our vaginal ring product, and higher biostudy,
raw material and headcount costs related to our generic development activities.
Merger-Related Costs
Merger-related costs related to our October 2001 merger with Duramed
Pharmaceuticals, Inc., included direct transaction costs such as investment
banking, legal, accounting and other costs; costs associated with facility and
product rationalization, and severance costs.
23
Proceeds from Patent Challenge Settlement
Proceeds from patent challenge settlement represent amounts earned under the
terms of the contingent supply agreement entered into with Bayer to settle our
patent challenge litigation regarding its Ciprofloxacin antibiotic. Under the
terms of the contingent supply agreement, Bayer, at its option, must either
supply us with Ciprofloxacin at a predetermined discount for resale or make
quarterly cash payments to us. To date, Bayer has elected to make payments to us
rather than supply us with Ciprofloxacin. Accordingly, we have recognized
proceeds from patent challenge settlements of $7,937 for the three months ended
December 31, 2001 and $8,562 for the three months ended December 31, 2002.
Interest Income
Interest income decreased 22% from $2,146 for the three months ended December
31, 2001 to $1,684 for the three months ended December 31, 2002, primarily due
to a decrease in market interest rates on our short-term investments. The
decline was partially offset by an increase in the average cash and cash
equivalents balance and marketable securities balance.
Interest Expense
Interest expense decreased 50% from $950 for the three months ended December 31,
2001 to $473 for the three months ended December 31, 2002, primarily due to a
decrease in our debt balances combined with lower interest rates on borrowings.
Other Income (Expense)
Other income for the three months ended December 31, 2001 included $2,000
related to a legal settlement.
Income Taxes
Our income tax provision for the three months ended December 31, 2001 reflected
a 41.35% effective tax rate on pre-tax income, compared to 37.25% for the three
months ended December 31, 2002. The decrease in the effective tax rate is
primarily due to certain merger-related costs for the three months ended
December 31, 2001 not being deductible for tax purposes.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
Revenues -- Overview
Total revenues for the six months ended December 31, 2002 were $429,463, a
decrease of 40% from $718,193 in the six months ended December 31, 2001. This
anticipated decrease in total revenues primarily was due to the sharp decline in
sales of our Fluoxetine 20 mg product, and a decrease in sales of Tamoxifen.
Partially offsetting the decline in sales of Fluoxetine and Tamoxifen was an 83%
increase in sales of other products, led by higher sales of our oral
contraceptive franchise of products, Dextroamphetamine products and Warfarin
Sodium.
24
Revenues -- Product Sales
Sales of products other than Fluoxetine and Tamoxifen increased 83% from
$169,392 for the six months ended December 31, 2001 to $310,412 for the six
months ended December 31, 2002. The increase was primarily attributable to
increased sales of our oral contraceptive products, for which sales nearly
tripled from the prior year period, our Dextroamphetamine products, which we
launched in February 2002, and Warfarin Sodium, which increased its overall
market share. Sales of oral contraceptives increased 273% from the six months
ended December 31, 2001 to the six months ended December 31, 2002. The increase
in sales of the oral contraceptives reflects higher sales of existing products,
including our Apri(R), Aviane(TM) and Nortrel(R) products and sales of
our new oral contraceptive products, including Camila(TM), Cryselle(TM),
Enpresse(TM), Kariva(TM), Lessina(TM), Portia(TM) and Sprintec(TM),
all of which we launched in the past twelve months.
In August 2001, we launched our Fluoxetine 20 mg capsule. Sales of Fluoxetine
were $311,107 for the six months ended December 31, 2001, constituting
approximately 44% of product sales in that period. On January 29, 2002, our
180-day generic exclusivity period on the Fluoxetine 20 mg capsules ended and,
as expected, the FDA approved several other generic versions. As a result, the
selling price declined dramatically and we lost market share to competing
products, causing our sales and profits from Fluoxetine to be substantially
lower than those earned during the exclusivity period. As a result of these
declines, for the six months ended December 31, 2002, sales of Fluoxetine were
less than 1% of product sales.
Tamoxifen sales decreased 50% from $226,749 for the six months ended December
31, 2001 to $112,512 for the six months ended December 31, 2002. This decrease
in sales is due to the expiration of our supply agreement with AstraZeneca on
August 21, 2002 and a December 2002 court decision concluding that we are not
entitled to launch our manufactured Tamoxifen tablets until the expiration of
AstraZeneca's pediatric exclusivity in February 2003, as discussed in greater
detail in the quarterly comparison above.
Revenues -- Development and Other Revenue
For the six months ended December 31, 2002, development and other revenue of
$3,080 includes royalty income earned under licensing agreements with other
third parties, our development agreement with the U.S. Department of Defense,
and our development agreement related to one of our vaginal ring products. For
the six months ended December 31, 2001, development and other revenue consisted
primarily of amounts received from DuPont Pharmaceuticals Company for various
development and co-marketing agreements entered into in March 2000. The assets
of DuPont have since been acquired by Bristol-Myers Squibb ("BMS") and the March
2000 agreements that generated these revenues ended in April 2002. We recorded
revenue from these agreements of $10,584 for the six months ended December 31,
2001.
25
Cost of Sales
Cost of sales decreased 52% from $429,516 for the six months ended December 31,
2001 to $205,791 for the six months ended December 31, 2002, primarily due to
lower sales of Fluoxetine and Tamoxifen. Cost of sales includes the profit split
paid to Apotex, Inc., our partner in the Fluoxetine patent challenge, and
royalties paid on certain other products to certain of our raw material
suppliers.
As a percentage of product sales, cost of sales decreased from 61% for the six
months ended December 31, 2001 to 48% for the six months ended December 31,
2002. The decrease in cost of sales as a percentage of product sales resulted
from sales of an improved product mix from a margin perspective, including lower
sales of Fluoxetine and Tamoxifen, both of which had margins that were generally
lower than the average earned on our other products, and an increasing
percentage of sales of higher-margin products such as our oral contraceptives,
Dextroamphetamine products and Warfarin Sodium.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 9% from $59,173 for the
six months ended December 31, 2001 to $64,401 for the six months ended December
31, 2002. The increase was primarily due to higher marketing expenses for
pre-launch activities related to our extended regimen oral contraceptive,
SEASONALE(R), increased legal costs, which include costs associated with
patent challenge activity, class action lawsuits and other matters; and
increased consulting costs primarily associated with various information
technology projects. Also contributing to the increase were the amortization of
intangible assets and a $1,330 write-off of an intangible asset related to a
product that we suspended development of pending review of future market
opportunities. Partially offsetting these increases were decreases in headcount
related costs due to synergies achieved as a result of the integration of
Duramed.
Research and Development
Research and development expenses increased 25% from $34,893 for the six months
ended December 31, 2001 to $43,583 for the six months ended December 31, 2002.
The increase reflected higher costs associated with increased clinical study and
headcount costs related to our proprietary development program, including costs
associated with our vaginal ring product, and higher biostudy and headcount
costs related to our generic development activities. Partially offsetting these
increases were reduced purchases of raw materials for use in both generic and
proprietary research and development activities.
Merger-Related Costs
Merger-related costs declined as merger-related costs in the prior year included
direct transaction costs related to our October 2001 merger with Duramed
Pharmaceuticals, Inc., such as investment banking, legal, accounting and other
costs, costs associated with facility and product rationalization.
26
Proceeds from Patent Challenge Settlement
Proceeds from patent challenge settlement represent amounts earned under the
terms of the contingent supply agreement entered into with Bayer to settle our
patent challenge litigation regarding Bayer's Ciprofloxacin antibiotic. Under
the terms of the contingent supply agreement, Bayer, at its option, must either
supply us with Ciprofloxacin at a predetermined discount for resale or make
quarterly cash payments to us. To date, Bayer has elected to make payments to us
rather than supply us with Ciprofloxacin. Accordingly, we have recognized
proceeds from patent challenge settlements of $15,875 for the six months ended
December 31, 2001 and $17,125 for the six months ended December 31, 2002.
Interest Income
Interest income decreased 20% from $3,983 for the six months ended December 31,
2001 to $3,181 for the six months ended December 31, 2002, primarily due to a
decrease in market interest rates on our short-term investments. The decline was
partially offset by an increase in the average cash and cash equivalents balance
and marketable securities balance.
Interest Expense
Interest expense decreased 60% from $2,241 for the six months ended December 31,
2001 to $921 for the six months ended December 31, 2002, primarily due to a
decrease in our debt balances combined with lower interest rates on borrowings.
Other Income (Expense)
Other income for the six months ended December 31, 2001 included $2,000 related
to a legal settlement.
Income Taxes
Our income tax provision for the six months ended December 31, 2001 reflected a
37.67% effective tax rate on pre-tax income, compared to 37.25% for the six
months ended December 31, 2002. The decrease in the effective tax rate is
primarily due to certain merger-related costs for the six months ended December
31, 2001 not being deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance increased $73,788 or 22% from $331,257 at
June 30, 2002, to $405,045 at December 31, 2002.
Operating Activities
Cash provided by operating activities was $117,636 for the six months ended
December 31, 2002, driven by net earnings of $84,604 and a small reduction in
working capital. Working capital, defined as current assets (excluding cash and
cash equivalents) less current liabilities, decreased slightly as decreases in
inventory and accounts receivable and an increase in income taxes payable more
than offset the decrease in accounts payable. The decrease in accounts payable
is primarily attributable to a reduction in the payable owed to AstraZeneca due
to
27
reduced Tamoxifen purchases. The $66,360 decrease in inventory is due primarily
to the sale of our entire stock of purchased Tamoxifen inventory. Income taxes
payable were higher at December 31, 2002 as compared to June 30, 2002 due to the
timing of our estimated tax payments.
Approximately $15,875 of our cash flows from operations for the six months ended
December 31, 2002 relates to payments from our contingent non-exclusive supply
agreement with Bayer Corporation related to our 1997 Cipro(R) patent challenge.
Under that agreement, Bayer, at its option, must either supply us with
Ciprofloxacin at a predetermined discount for resale or provide us with
quarterly cash payments. This contingent supply agreement expires in December
2003. If Bayer does not elect to supply us with product, we would receive
payments totaling approximately $34,250 for the remainder of the agreement,
which expires in December 2003. If Bayer elected to supply product to us for
resale, the earnings and related cash flows we could earn, if any, from the sale
of Ciprofloxacin would be entirely dependent upon market conditions. The supply
agreement also provides that, six months prior to patent expiry, if we are not
already distributing the product, we, along with our partner, will have the
right to begin distributing Ciprofloxacin product manufactured by Bayer.
We expect operating cash flows over the next several years to be favorably
impacted by our continued utilization of federal net operating loss
carryforwards acquired in our merger with Duramed. The annual limitation on the
amount of the pre-merger net operating loss that may be deducted is governed by
Section 382 of the Internal Revenue Code. We believe utilizing such federal net
operating losses could generate approximately $9,800 of cash flows in fiscal
2003.
We expect that cash flows from operations for the balance of fiscal 2003 will be
substantially higher than those achieved in the second half of fiscal 2002 and
in-line with those achieved in the first half of fiscal 2003. The significant
increase over the prior year is due primarily to estimated expected
year-over-year changes in certain working capital components and higher earnings
from operations. Higher earnings from operations are expected due to the
continued success of our oral contraceptive products, new product launches and
increased market share gains for Warfarin.
Investing Activities
During fiscal 2002, we initiated a multi-year capital expansion program to
increase our production, laboratory, warehouse and distribution capacity in
Virginia and Cincinnati. In addition to continuing these programs in fiscal
2003, we also continued to add and upgrade equipment in all of our locations.
These capital programs are designed to help ensure that we have the
manufacturing, distribution and laboratory facilities necessary to meet the
expected demand of our pipeline products and handle the increases in current
product sales, including our line of oral contraceptives.
During the six months ended December 31, 2002, we incurred $35,930 of capital
expenditures and believe our fiscal 2003 capital expenditures could exceed our
previous estimates of approximately $60,000 and instead be in the range of
$90,000 to $100,000. The current year spending estimate includes substantially
completing the multi-year capital expansion programs noted above and substantial
completion of the construction of a dedicated facility for the manufacture of
the Adenovirus vaccine, the cost of which is being reimbursed by the Federal
28
government. The primary reason for the higher than expected spending in the
fiscal year is due to construction costs related to the relocation of our
executive and administrative offices and the anticipated purchase of a new
enterprise resource planning system before the end of fiscal 2003. We do not
expect capital spending to continue at this level past fiscal 2003, principally
due to the planned completion of several large projects in fiscal 2003. We
expect fiscal 2004 levels to be substantially lower than fiscal 2003.
While we believe we have the cash resources to fund the capital spending
described above from cash derived from operations, given the large scale and
extended nature of some of the planned expenditures, we may consider financing a
portion of our projects. We believe we have the capital structure and cash flow
to complete any such financing.
In December 2002 we completed the sale of a redundant manufacturing facility
with a carrying amount of $2,328.
In fiscal 2002, we entered into a Loan and Security Agreement (the "Loan
Agreement") with Natural Biologics, the raw material supplier for our generic
conjugated estrogens product. We believe that the raw material is
pharmaceutically equivalent to raw material used to produce Wyeth's
Premarin(R). Natural Biologics is a defendant in litigation brought by Wyeth
alleging that Natural Biologics misappropriated certain Wyeth trade secrets with
respect to the preparation of this raw material. This case was tried in November
2002, and a decision may be rendered by the trial court at any time. An
unfavorable decision for Natural Biologics could materially and adversely affect
Natural Biologics' ability to repay the loans we have made to it. If that were
to be the case, we may be required to write-off all or a portion of the loans
made to Natural Biologics. As of December 31, 2002, we had loaned Natural
Biologics approximately $9,320 pursuant to the terms of this agreement, which we
have included on our balance sheet in other assets.
Under the terms of the Loan Agreement, absent the occurrence of a material
adverse event (including, without limitation, an unfavorable court decision in
the Wyeth matter), we could loan Natural Biologics up to $35,000 over a
three-year period, including an additional $4,580 during fiscal 2003, and $8,300
and $2,800 during fiscal 2004 and 2005, respectively. The Loan Agreement also
provides for a loan of $10,000 based upon the successful outcome of the pending
legal proceeding between Wyeth and Natural Biologics, as discussed above. The
loans mature on June 3, 2007.
In fiscal 2002, we also entered into a Development, Manufacturing and
Distribution Agreement with Natural Biologics which could obligate us to make
milestone payments totaling an additional $35,000 to Natural Biologics based on
achieving certain legal and product approval milestones, including the approval
of a generic product.
As of December 31, 2002, we have invested $24,400 in five market auction debt
securities that are readily convertible into cash at par value with maturity
dates ranging from July 21, 2003 to July 7, 2004. We may continue to invest in
extended maturity securities based on operating needs and strategic
opportunities.
On November 26, 2002 we signed a letter of intent to acquire the rights to three
currently marketed Wyeth products and an option to acquire the rights to a
fourth product currently
29
marketed by Wyeth. In addition, under the terms of the letter of intent, we
would acquire a license from Wyeth for a late- stage oral contraceptive product.
If acquired, we intend to complete development on this late-stage product and
market it in the United States. At closing, we would make a payment of
approximately $25,000 to Wyeth, and would make additional future payments as
sales milestones are achieved. In addition, we would assume the obligation to
purchase up to $10,000 in raw material inventory over the next three years.
The transaction, which we expect to close in the third quarter of fiscal 2003,
is subject to completion of due diligence procedures and the satisfaction of
other customary conditions, including Hart-Scott-Rodino antitrust filings, FDA
approvals and approvals of the Board of Directors of both Barr and Wyeth.
As currently contemplated, upon closing of the transactions with Wyeth, we would
terminate the litigation with Wyeth relating to the anti-trust suit filed in
September 2000 by Duramed Pharmaceuticals, Inc. against Wyeth-Ayerst
Laboratories, Inc. The termination of this litigation will require a one-time
payment to our legal counsel of approximately $20,000.
Financing Activities
We have not engaged in any off-balance sheet financing involving unconsolidated
subsidiaries.
Debt balances decreased by approximately $3,709 during the six months ended
December 31, 2002 due to scheduled debt repayments. Scheduled principal
repayments on our existing debt will be approximately $7,029 for the next twelve
months. We have a $40,000 revolving credit facility that expires on February 27,
2005. We currently have approximately $29,312 available under this facility
while the balance of the facility was committed as a $10,688 letter of credit in
support of our finite risk insurance arrangement described below.
Other
On September 27, 2002, we committed to make a minimum aggregate contribution of
$9,200 to the Barr Laboratories, Inc. Savings and Retirement Plan for the fiscal
year ending June 30, 2003. As of December 31, 2002, we have funded $4,500 of the
contribution commitment and have recorded an asset and a matching liability
equal to the remaining contribution commitment.
Due to the significant increase in the cost of product liability insurance, on
September 30, 2002 we entered into a finite risk insurance arrangement (the
"Arrangement") with a third party insurer. We believe that the Arrangement is an
effective way to insure against a portion of potential product liability claims.
In exchange for $15,000 in product liability coverage over a five-year term, the
Arrangement provides for us to pay approximately $14,250 in four equal annual
installments of $3,563 beginning in October 2002. At any six-month interval, we
may, at our option, cancel the Arrangement. In addition, at the earlier of
termination or expiry, we are eligible for a return of all amounts paid to the
insurer, less the insurer's margin and amounts for any incurred claims. We are
recording the payments, net of the insurer's margin, as deposits included in
other assets.
30
We continue to be self-insured for potential product liability claims between
$15,000 and $25,000. We have purchased additional coverage from an insurance
carrier for product liability claims related to certain products from $25,000 to
$50,000.
No significant product liability claim has ever been paid by us. However, if a
claim was filed and we were not successful in the defense of the suit, it could
have a material adverse effect on our business and financial condition to the
extent any loss from such judgment was self-insured or exceeded policy limits.
To expand our business opportunities, we have 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.
We believe that our current cash balances, cash flows from operations and
borrowing capacity, including unused amounts under our $40,000 revolving credit
facility, will be adequate to meet the operations described above and to take
advantage of certain strategic opportunities as they occur. To the extent that
additional capital resources are required, we believe that such capital may be
raised by additional bank borrowings, debt or equity offerings or other means.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 supercedes APB opinion No. 17, "Intangible
Assets." Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed for impairment annually, or more frequently if
impairment indicators arise. The provisions of SFAS 142 are effective for fiscal
years beginning after December 15, 2001.
The Company adopted SFAS 142 on July 1, 2002. SFAS 142 requires goodwill to be
tested for impairment annually using a two-step process to determine the amount
of impairment, if any, which is then written-off. The first step is to identify
potential impairment, which is measured as of the beginning of the fiscal year.
To accomplish this, the Company has identified its reporting units and
determined the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units. Under SFAS 142, to the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired. During the second quarter of 2003, we completed the
first step of this process and determined there was no indication of goodwill
impairment.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition Disclosure, An Amendment of FASB Statement No. 123"
("SFAS 148"). This statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of Statement No. 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. We will adopt SFAS 148 for the fiscal
31
quarter ending March 31, 2003. We believe that the adoption of SFAS 148 will not
have a material impact on our results of operations or financial position.
OUTLOOK
Revenues
Revenue estimates are based on a variety of factors including the timing of new
product launches and the potential impact of competitive pricing on existing
products. Many of these factors are outside of our control.
Total revenues are expected to increase slightly in the second half of the year
as compared to the $429,000 we recorded in the first half of the year as sales
from new product launches, including a distributed version of Ciprofloxacin, are
expected to offset declining sales of Tamoxifen.
We are forecasting sales in the second half of fiscal 2003 for our manufactured
version of Tamoxifen, which we anticipate launching on or about February 20,
2003, to be approximately $15,000 to $20,000. This is down from the $113,000 in
sales of distributed Tamoxifen we recorded in the first half of fiscal 2003.
This decline reflects expected price declines and a lower market share caused by
the launch of several competing generic versions when the innovator's
exclusivity period ends in February 2003.
We expect sales of our oral contraceptive products in the second half of the
fiscal year to exceed the $114,000 of sales in the first half of the fiscal
year. This continued growth is expected to be led by both increasing market
shares for our existing products and contributions from new product launches
including Nortrel 777 and Errin, which we launched in early January 2003. As a
result we continue to expect oral contraceptive sales in fiscal 2003 to triple
compared to the $93,000 we recorded in fiscal 2002.
Sales of our Cenestin (Synethic Conjugated Estrogens, A) product are expected to
increase slightly in the second half of the year compared to the $23,000 of
sales in the first half of the year, reflecting modest market share gains, the
impact of our recent Cenestin price increase and the expected launch of our .45
mg Cenestin product in the fourth quarter of fiscal 2003.
We expect to see sales of our other products to remain relatively consistent in
the second half of the year, compared to sales of approximately $177,000 in the
first half of the year. Price increases on select existing products and new
product launches, including the expected launch of Isotrentinoin, are expected
to help offset potential declines in sales of other products.
We expect to be able to launch a distributed version of Ciprofloxacin during
June 2003. Under the terms of our contingent supply agreement with Bayer, we
expect to purchase inventory from Bayer for resale sometime in the fourth
quarter. As a distributed product, the gross profit margin from sales of
Ciprofloxacin will be well below the margins we have recently earned on our
manufactured products, and we will be splitting the gross profit with our
partner. Based on an assumed launch during the middle of June 2003, we expect
Ciprofloxacin to contribute sales of between $65,000 to 75,000 in the fourth
quarter.
32
Proceeds from Patent Challenge Settlement
Proceeds from patent challenge settlement are amounts earned pursuant to the
supply agreement entered into as part of the 1997 settlement of our patent
challenge on Bayer's Ciprofloxacin product. We assume that Bayer will elect, as
they have in the past, not to provide product to us for resale prior to June
2003, at which point we will no longer earn these proceeds. As a result, we
expect proceeds from patent challenges in the third quarter to be consistent
with first and second quarter levels, we expect proceeds in the fourth quarter
will decline to approximately $5,600.
Margins
Product margins represent the amount of gross profit we expect to earn on
product sales expressed as a percentage of product sales. The absence of sales
of a distributed version of Tamoxifen is expected to cause overall gross profit
margins to increase in the third quarter when compared to the average overall
gross profit margin of 52% earned during the first half of fiscal 2003. The
anticipated launch of a distributed version of Ciprofloxacin in June is expected
to lower overall gross profit margins in the fourth quarter as compared to the
third quarter, as our margins on our distributed version of Ciprofloxacin are
expected to be substantially lower than the margins we earn on products we
manufacture, as discussed above. Excluding Tamoxifen and Ciprofloxacin, gross
profit margins during the second half of the year are forecasted to remain
relatively consistent with those achieved during the first half of the year.
Selling, general and administrative
Selling, general and administrative expenses are expected to increase to a range
of approximately $70,000 to $75,000 in the second half of fiscal 2003 compared
to the approximately $64,000 incurred during the first half of the year,
primarily due to higher sales and marketing costs. These higher sales and
marketing costs will primarily relate to the anticipated increase in our female
healthcare salesforce, which we plan to grow from its current size of
approximately 125 sales representatives to approximately 225 by the beginning of
the fourth quarter. Promotion and advertising costs are also expected to be
higher in the second half of fiscal 2003 compared to the first half due to
increased spending on Cenestin and pre-launch programs for SEASONALE. Also
contributing to the expected increase in selling, general and administrative
expenses will be higher administrative costs including one-time costs associated
with the relocation of our executive and administrative offices which is
expected to take place in the fourth quarter.
Research and development
Research and development expenses are expected to increase to approximately
$45,000 to $50,000 in the second half of fiscal 2003 compared to the
approximately $44,000 incurred during the first half of fiscal 2003. This
increase reflects expected increases in bio-study and new drug development
activities and somewhat higher headcount costs reflecting continued additions to
our proprietary development team.
33
Other
Net interest income is expected to be in line with the first half of the year as
the average cash and cash equivalents and debt balances should be relatively
constant.
We continue to forecast an effective tax rate of 37.25% for the second half of
fiscal year 2003, consistent with the effective tax rate for the first half of
the fiscal year.
Earnings per share
Barr had approximately 46 million fully diluted shares outstanding as of
December 31, 2002. Our weighted average fully diluted shares outstanding over
the past six quarters have ranged from 44 million to 46 million with the number
impacted by option grants, changes in our stock price, and the issuance or
repurchase of common stock. Other than option and warrant exercises, we did not
issue any shares during the first half of fiscal 2003 and did not repurchase any
shares. Assuming our stock price remains at current levels, which is above our
average stock price during the first half of the year, we expect the number of
fully diluted shares outstanding to be somewhat higher in the second half of the
year compared to the fully diluted shares at December 31, 2002. We are not
assuming any share issuances for acquisitions or equity offerings or any share
repurchases, though we may consider such activities if appropriate opportunities
are identified.
Based on our estimates and assumptions, many of which are described above, we
expect our earnings for fiscal 2003 to be in the range of $3.85 to $3.95 per
share on a fully diluted basis. Based on the assumed timing of product launches
and expense levels, we expect our fully diluted earnings per share in the fourth
quarter to be approximately $0.10 higher than our forecasted range of $0.95 to
$1.00 per share for the third quarter.
Business development activities
A growing part of our business strategy includes identifying and completing
business development opportunities. Such opportunities include but are not
limited to product acquisitions, technology or product license arrangements,
joint-venture agreements, merger or acquisitions or the settlement of legal
matters. At any time, we may be pursuing one or more of these kinds of
arrangements such as the one contemplated by our letter of intent with Wyeth
regarding a product acquisition and development arrangement in connection with
the settlement of litigation. However, the forecasts and outlook provided herein
do not include the impact of any such transaction on our statement of operations
or balance sheet during the second half of fiscal 2003 or beyond. We do not
undertake any obligation to provide updates to the forecasts given above if such
transactions are completed.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for a change in interest rates relates primarily to
our investment portfolio of approximately $429,553 and debt instruments of
approximately $44,262. We do not use derivative financial instruments.
Our investment portfolio consists of cash and cash equivalents and marketable
securities classified as "available for sale." The primary objective of our
investment activities is to preserve principal while at the same time maximizing
yields without significantly increasing risk. To achieve this objective, we
maintain our portfolio in a variety of high credit-quality securities, including
U.S. government and corporate obligations, certificates of deposit and money
market funds. Ninety-four percent of our portfolio matures in less than three
months. The carrying value of the investment portfolio approximates the market
value at December 31, 2002. Because our investments are diversified and are of
relatively short maturity, a hypothetical 1 or 2 percentage point change in
interest rates would not have a material effect on our consolidated financial
statements.
At December 31, 2002, approximately 65% of our debt instruments are subject to
fixed interest rates. The related note purchase agreements permit us to prepay
these notes prior to their scheduled maturity, but may require us to pay a
prepayment fee based on market rates at the time of prepayment. The remaining
35% of debt instruments are primarily subject to variable interest rates based
on the prime rate. The fair value of all debt instruments is approximately
$41,000 at December 31, 2002. In addition, borrowings under our $40,000
unsecured, revolving credit facility (the "Revolver") with Bank of America,
N.A., bear interest at a variable rate based on the prime rate, the Federal
Funds rate or LIBOR. At December 31, 2002, there were no amounts outstanding
under the Revolver. We currently have approximately $29,312 available under the
Revolver, while the balance of the Revolver was committed as a $10,688 letter of
credit in support of our product liability insurance arrangements. We do not
believe that any risk inherent in these instruments is likely to have a material
effect on our consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to insure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chairman and Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding management's control objectives.
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including the Chairman and Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chairman and Chief
35
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective in alerting them in a timely manner to
information relating to Barr and its consolidated subsidiaries required to be
disclosed in this report.
CHANGES IN INTERNAL CONTROLS
Subsequent to the date of their evaluation as described above, there have not
been any significant changes in our internal controls or in other factors that
could significantly affect these controls. No significant deficiencies or
material weaknesses have been identified.
36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Desmopressin Acetate (DDAVP,(R))
On July 31, 2002, we filed an ANDA seeking approval from the FDA to market
desmopressin acetate tablets, the generic equivalent of Aventis' DDAVP(R)
product. We notified Ferring AB, the patent holder, and Aventis pursuant to the
provisions of the Hatch-Waxman Act on October 29, 2002. Ferring and Aventis
filed a suit in the United States District Court for the Southern District of
New York on December 13, 2002 for infringement of one of the four patents listed
in the Orange Book for desmopressin acetate tablets, seeking to prevent us from
marketing desmopressin acetate tablets until the patent expires in 2008. On
January 6, 2003, we filed an answer and counterclaim asserting non-infringement
and invalidity of all four listed patents. We are presently waiting for the
plaintiff's response to the counterclaims.
We believe that we were the first applicant to file an ANDA containing a
paragraph IV patent challenge to this product. If so, we may be eligible for 180
days of generic exclusivity, depending on a variety of factors.
Raloxifene Hydrochloride (Evista(R))
On June 21, 2002, we filed an ANDA seeking approval from the FDA to market
certain Raloxifene Hydrochloride tablets, the generic equivalent of Eli Lilly's
Evista(R) product. We notified Eli Lilly pursuant to the provisions of the
Hatch-Waxman Act on October 15, 2002. After the filing of our ANDA, Eli Lilly
listed an additional patent on Evista(R) in the Orange Book. We have filed
appropriate amendments to our ANDA to include the newly listed patent and
notified Eli Lilly on November 22, 2002. On November 26, 2002, Eli Lilly filed a
suit in the United States District Court for the Southern District of Indiana
for infringement of several listed patents, including the newly listed patent,
seeking to prevent us from marketing raloxifene hydrochloride tablets until the
patents expire in 2004, 2012, 2014, 2015 and 2017. We answered the complaint on
December 16, 2002 and filed an amended answer on December 30, 2002.
We believe that we were the first applicant to file an ANDA containing a
paragraph IV patent challenge to this product. If so, we may be eligible for 180
days of generic exclusivity, depending on a variety of factors.
Fexofenadine Hydrochloride Capsules (Allegra(R)); Fexofenadine Hydrochloride
Tablets (Allegra(R)); Fexofenadine Hydrochloride / Psudoephedrine Hydrochloride
(Allegra-D(R))
We previously disclosed these cases in our annual report Form 10-K for the year
ended June 30, 2002 as filed with the SEC on August 26, 2002. On March 27, 2002,
all three cases were consolidated for all purposes. After the filing of our
ANDAs, Aventis listed an additional patent on Allegra(R) and Allegra-D(R)
in the Orange Book. We filed appropriate amendments to our ANDAs to address the
newly listed patent and, on November 1, 2002 and November 4, 2002 respectively,
notified Merrell Pharmaceuticals, Inc., the patent holder, and Aventis pursuant
to
37
the provisions of the Hatch-Waxman Act. Aventis filed an amended complaint on
November 12, 2002, claiming that our ANDA infringes the newly listed patent.
Niacin (Niaspan(R))
We previously disclosed this case in our annual report Form 10-K for the year
ended June 30, 2002 as filed with the SEC on August 26, 2002. After the filing
of our ANDAs, KOS listed an additional patent on Niaspan in the Orange Book. We
filed appropriate amendments to our ANDAs to address the newly listed patent
and, on September 30, 2002, notified KOS pursuant to the provisions of the
Hatch-Waxman Act. KOS filed a complaint on November 12, 2002, claiming that our
ANDA infringes the newly listed patent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Barr Laboratories, Inc. was held on
October 24, 2002 at The Plaza Hotel in New York City. Of the 43,760,508 shares
entitled to vote, 34,950,602 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 nine nominees were elected based on the following votes cast:
FOR SHARES
Bruce L. Downey 30,481,304
Paul M. Bisaro 30,521,105
Carole S. Ben-Maimon 29,773,441
George P. Stephan 33,747,738
Jack M. Kay 34,587,004
Harold N. Chefitz 33,415,764
Richard R. Frankovic 34,421,144
Peter R. Seaver 33,919,019
James S. Gilmore, III 34,577,212
2. To consider a proposal for approval of the Barr Laboratories, Inc. 2002
Stock and Incentive Award Plan. The proposal was approved based on the
following votes cast:
For 24,419,708
Against 4,912,396
Abstained 97,501
38
3. To consider a proposal for approval of the Barr Laboratories, Inc. 2002
Stock Option Plan for Non-Employee Directors. The proposal was approved
based on the following votes cast:
For 26,573,731
Against 2,747,058
Abstained 108,816
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no exhibits filed as part of this Form 10-Q.
(b) We filed the following reports on Form 8-K in the quarter ended
December 31, 2002.
REPORT DATE ITEM REPORTED
November 14, 2002 We filed with the Securities and Exchange
Commission our Quarterly Report on Form
10-Q for the three months ended September
30, 2002. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, the Form 10-Q
was accompanied by a certification of Bruce
L. Downey, Chairman of the Board and Chief
Executive Officer of the Company, and
William T. McKee, Chief Financial Officer
of the Company.
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: January 29, 2003 /s/ William T. McKee
--------------------
William T. McKee
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
39
RULE 13A-14 CERTIFICATIONS
I, Bruce L. Downey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Barr
Laboratories, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
40
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 29, 2003
/s/ Bruce L. Downey
-------------------
Bruce L. Downey
Chief Executive Officer
I, William T. McKee, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Barr
Laboratories, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
41
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 29, 2003
/s/ William T. McKee
--------------------
William T. McKee
Chief Financial Officer
42