UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2003 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
Number of shares of common stock outstanding as of November 5, 2003: 67,209,951
BARR LABORATORIES, INC.
INDEX TO FORM 10-Q
PAGE
NUMBER
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2003 (unaudited) and June 30,
2003....................................................................... 1
Consolidated Statements of Operations (unaudited) for the three months ended
September 30, 2003 and 2002 ............................................... 2
Consolidated Statements of Cash Flows (unaudited) for the three months ended
September 30, 2003 and 2002 ............................................... 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....................... 30
Item 4. Controls and Procedures.......................................................... 31
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 33
Item 6. Exhibits and Reports on Form 8-K................................................. 36
Signatures....................................................................... 37
ii
BARR LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30,
2003 JUNE 30,
(UNAUDITED) 2003
----------- ----
ASSETS
Current assets:
Cash and cash equivalents $ 418,055 $ 367,142
Marketable securities 46,400 29,400
Accounts receivable, net (including receivables from related parties of $1,153 at
September 30, 2003 and $2,398 at June 30, 2003) 140,790 221,652
Other receivables 13,034 31,136
Inventories 165,885 163,926
Deferred income taxes 27,375 27,375
Prepaid expenses 13,127 6,873
----------- -----------
Total current assets 824,666 847,504
Property, plant and equipment, net of accumulated depreciation
of $101,588 and $100,314, respectively 231,422 223,516
Deferred income taxes 5,572 5,589
Marketable securities 6,794 15,055
Other intangible assets 44,880 45,949
Goodwill 14,118 14,118
Other assets 16,782 29,206
----------- -----------
Total assets $ 1,144,234 $ 1,180,937
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 75,733 $ 188,852
Accrued liabilities (including accrued liabilities to related parties of $1,287 at
September 30, 2003 and $648 at June 30, 2003) 78,138 66,109
Current portion of long-term debt 7,029 7,029
Current portion of capital lease obligations 1,496 1,481
Income taxes payable 14,133 11,316
----------- -----------
Total current liabilities 176,529 274,787
Long-term debt 30,228 30,629
Long-term capital lease obligations 3,309 3,398
Other liabilities 5,079 4,128
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 67,421,024 and 67,066,196, respectively 674 671
Additional paid-in capital 348,534 326,001
Retained earnings 580,745 542,210
Accumulated other comprehensive loss (156) (179)
----------- -----------
929,797 868,703
Treasury stock, at cost: 280,398 shares (708) (708)
----------- -----------
Total shareholders' equity 929,089 867,995
----------- -----------
Total liabilities and shareholders' equity $ 1,144,234 $ 1,180,937
=========== ===========
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
SEPTEMBER 30,
2003 2002
---- ----
Revenues:
Product sales (including sales to related parties of $2,102 and $2,869
for the three months ended September 30, 2003 and 2002, respectively) $308,760 $218,716
Development and other revenue 1,951 1,712
-------- --------
Total revenues 310,711 220,428
Costs and expenses:
Cost of sales (including amounts paid to related parties of $1,611 and $1,301
for the three months ended September 30, 2003 and 2002, respectively) 160,901 110,919
Selling, general and administrative 65,541 31,312
Research and development 23,466 21,138
-------- --------
Earnings from operations 60,803 57,059
Proceeds from patent challenge settlement - 8,563
Interest income 1,260 1,497
Interest expense 839 448
Other (expense) income (58) 34
-------- --------
Earnings before income taxes 61,166 66,705
Income tax expense 22,631 24,848
-------- --------
Net earnings $ 38,535 $ 41,857
======== ========
Earnings per common share - basic $ 0.58 $ 0.64
======== ========
Earnings per common share - diluted $ 0.55 $ 0.61
======== ========
Weighted average shares 66,697 65,581
======== ========
Weighted average shares - diluted 70,310 68,347
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
2
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 38,535 $ 41,857
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 6,788 4,949
Provision for losses on loans to Natural Biologics 15,729 -
Loss on disposal of property, plant & equipment 138 -
Other (12) (18)
Tax benefit of stock incentive plans 12,429 844
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net 98,964 2,375
Inventories (1,959) 34,997
Prepaid expenses 997 1,190
Other assets (2,002) (550)
Increase (decrease) in:
Accounts payable, accrued liabilities and other liabilities (107,390) (58,205)
Income taxes payable 2,817 20,279
--------- ---------
Net cash provided by operating activities 65,034 47,718
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (13,439) (19,111)
Loans to Natural Biologics (1,321) (2,044)
Purchases of marketable securities, net (8,700) (5,000)
--------- ---------
Net cash used in investing activities (23,460) (26,155)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases (768) (1,174)
Proceeds from exercise of stock options and employee stock purchases 10,107 3,876
--------- ---------
Net cash provided by financing activities 9,339 2,702
--------- ---------
Increase in cash and cash equivalents 50,913 24,265
Cash and cash equivalents at beginning of period 367,142 331,257
--------- ---------
Cash and cash equivalents at end of period $ 418,055 $ 355,522
========= =========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period:
Interest, net of portion capitalized $ 465 $ 27
========= =========
Income taxes $ 7,487 $ 3,725
========= =========
Non-cash transactions:
Equipment under capital lease $ 293 $ 94
========= =========
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 audited consolidated financial statements of the Company for the
year ended June 30, 2003, included in the annual report on Form 10-K
filed by the Company with the Securities and Exchange Commission (the
"SEC") on August 26, 2003, as amended by Form 10-K/A thereto filed by
the Company with the SEC on August 29, 2003. 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 months
ended September 30, 2003, may not be indicative of the results to be
expected for the fiscal year ending June 30, 2004.
2. ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The methods, estimates and judgments the Company uses in applying the
accounting policies most critical to its financial statements have a
significant impact on its reported results. 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
that 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 (Note 3); (2) accrual of inventory reserves
(Note 7); (3) deferred taxes; (4) accrual for litigation (Note 14); (5)
accrual for self-insurance reserve (Note 14); 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 are less likely
to have a material impact on its reported results of operations for a
given period. Although the Company believes that its estimates and
assumptions are reasonable, they are based upon information available
at the time the estimates and assumptions were made. Actual results may
differ significantly from the Company's estimates and its estimates
could be different using different assumptions or conditions.
4
3. ACCOUNTS RECEIVABLE
Accounts receivable are presented net of allowances related to
provisions for product returns, rebates, chargebacks and other sales
allowances of $125,037 at September 30, 2003 and $136,059 at June 30,
2003.
4. STOCK-BASED COMPENSATION
The Company has three stock-based employee compensation plans, two
stock-based non-employee director compensation plans and an employee
stock purchase plan. The Company accounts for these plans under the
intrinsic value method described in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. The Company, applying the intrinsic value method, has
not recorded stock-based employee compensation cost in net income. The
following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," to its
stock-based employee compensation.
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---------- -----------
NET INCOME, AS REPORTED $ 38,535 $ 41,857
Add:
Stock-based employee compensation
expense included in reported net income,
net of related tax effects - -
Deduct:
Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 2,802 1,426
---------- -----------
PRO FORMA NET INCOME $ 35,733 $ 40,431
========== ===========
EARNINGS PER SHARE:
Basic - as reported $ 0.58 $ 0.64
========== ===========
Basic - pro forma $ 0.54 $ 0.62
========== ===========
Diluted - as reported $ 0.55 $ 0.61
========== ===========
Diluted - pro forma $ 0.51 $ 0.59
========== ===========
5. RECENT ACCOUNTING PRONOUNCEMENTS
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"),
which is generally effective
5
for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. SFAS 149
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in
SFAS No. 133, clarifies when a derivative contains a financing
component, amends the definition of an "underlying" to conform it to
the language used in FASB Interpretation No. 45, "Guarantor Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," and amends certain other
existing pronouncements. The Company currently has no involvement with
derivative financial instruments, and the adoption of SFAS 149 on July
1, 2003 did not have a material impact on its consolidated financial
statements.
Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS 150"). SFAS 150 modifies the accounting for certain
financial instruments that, under previous guidance, issuers could
account for as equity. SFAS 150 requires that those instruments be
classified as liabilities in statements of financial position and
affects an issuer's accounting for (1) mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange for cash
or other assets, (2) instruments, other than outstanding shares, that
do or may require the issuer to buy back some of its shares in exchange
for cash or other assets, or (3) obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index, or varies inversely
with the value of the issuer's shares. In addition to its requirements
for the classification and measurement of financial instruments within
its scope, SFAS 150 also requires disclosures about alternative ways of
settling those instruments and the capital structure of entities, all
of whose shares are mandatorily redeemable. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted SFAS 150 on July 1,
2003 with no material impact on its consolidated financial statements.
6. OTHER RECEIVABLES
Other receivables consist primarily of patent challenge settlement
receivables and receivables related to development and other revenue
(See Note 11).
7. INVENTORIES
Inventories consist of the following:
September 30, June 30,
2003 2003
--------------- ------------
Raw materials and supplies $ 67,140 $ 60,075
Work-in-process 19,682 18,561
Finished goods 79,063 85,290
--------------- ------------
Total $ 165,885 $ 163,926
=============== ============
6
Inventories are presented net of reserves of $16,159 and $13,201 at
September 30, 2003 and June 30, 2003, respectively. The Company's
distributed version of Ciprofloxacin, purchased as a finished product
from Bayer, accounted for approximately $43,924 and $48,300 of finished
goods inventory as of September 30, 2003 and June 30, 2003,
respectively.
8. RELATED PARTIES
Dr. Bernard C. Sherman
During the three months ended September 30, 2003 and 2002, the Company
purchased $1,426 and $913, respectively, of bulk pharmaceutical
material from companies affiliated with Dr. Bernard C. Sherman, the
Company's largest shareholder and a director until October 24, 2002. In
addition, during the three months ended September 30, 2003 and 2002,
the Company sold $2,102 and $2,869, respectively, of its pharmaceutical
products and bulk pharmaceutical materials to companies owned by Dr.
Sherman. As of September 30, 2003 and June 30, 2003, the Company's
accounts receivable included $1,153 and $2,398, respectively, due from
such companies.
During fiscal 1996, the Company also entered into an agreement with a
company owned by Dr. Sherman to share litigation and related costs in
connection with its Fluoxetine patent challenge. For the three months
ended September 30, 2003 and 2002, the Company recorded $273 and $135,
respectively, in connection with such agreement as a reduction to
operating expenses. For the three months ended September 30, 2003 and
2002, the Company recorded $185 and $388, respectively, as cost of
sales related to this agreement.
As of September 30, 2003 and June 30, 2003, the Company's accrued
liabilities included $1,287 and $648, respectively, related to
transactions with these entities.
9. OTHER INTANGIBLE ASSETS
Intangible assets, excluding goodwill, which are comprised primarily of
product licenses and product rights and related intangibles, consist of
the following:
September 30, June 30,
2003 2003
--------------- -----------
Product licenses $ 27,050 $ 26,800
Product rights and related intangibles 22,046 22,046
--------------- -----------
49,096 48,846
Less: accumulated amortization (4,216) (2,897)
--------------- -----------
Intangible assets, net $ 44,880 $ 45,949
=============== ===========
7
Estimated amortization expense on product licenses and product rights
and related intangibles is as follows:
Year Ending
June 30,
--------
2004 $ 5,291
2005 5,303
2006 5,303
2007 5,303
2008 5,303
The Company's product licenses and product rights and related
intangibles have weighted average useful lives of approximately 10.0
and 8.75 years, respectively.
10. LONG-TERM DEBT
The Company has a $40,000 revolving credit facility that expires on
February 27, 2005. As of September 30, 2003, there was approximately
$32,875 available to the Company under this facility due to the
issuance of a $7,125 letter of credit in support of outstanding
premiums on the Company's product liability insurance (see Note 14).
11. DEVELOPMENT AND OTHER REVENUE
For the three months ended September 30, 2003 and 2002, development and
other revenue included 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.
12. EARNINGS PER SHARE
On February 18, 2003, the Company's Board of Directors declared a
3-for-2 stock split effected in the form of a 50% stock dividend.
Approximately 22.2 million additional shares of common stock were
distributed on March 17, 2003 to shareholders of record at the close of
business on February 28, 2003. All applicable prior period share and
per share amounts have been adjusted for the stock split.
The following is a reconciliation of the numerators and denominators
used to calculate earnings per common share ("EPS") in the consolidated
statements of operations:
8
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
(in thousands, except per share amounts) 2003 2002
-------------- ----------
EARNINGS PER COMMON SHARE - BASIC:
Net earnings (numerator) $ 38,535 $ 41,857
Weighted average shares (denominator) 66,697 65,581
Net earnings $ 0.58 $ 0.64
============== ==========
EARNINGS PER COMMON SHARE - DILUTED:
Net earnings (numerator) $ 38,535 $ 41,857
Weighted average shares 66,697 65,581
Effect of dilutive options 3,613 2,766
-------------- ----------
Weighted average shares - diluted
(denominator) 70,310 68,347
Net earnings $ 0.55 $ 0.61
============== ==========
2003 2002
(in whole share amounts) ---- ----
Not included in the calculation of diluted
earnings per share because their
impact is antidilutive:
Stock options outstanding - 1,266
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 September 30, 2003 and
2002 was $38,558 and $41,802 respectively.
14. COMMITMENTS AND CONTINGENCIES
Leases
The Company is party to various leases which relate to the rental of
office facilities and equipment. The Company believes it will be able
to extend such leases, if necessary. The table below shows the future
minimum rental payments, exclusive of taxes, insurance and other costs
under noncancellable long-term leases.
9
Fiscal Year Ending June 30,
2004 2005 2006 2007 2008 Thereafter
-----------------------------------------------------------------------------------------------------------
Operating leases $ 1,634 $ 2,632 $ 2,064 $ 2,038 $ 2,120 $ 15,019
Capital leases 2,112 1,828 1,631 795 143 -
-----------------------------------------------------------------------------------------------------------
Minimum lease payments 3,746 4,460 3,695 2,833 2,263 15,019
-----------------------------------------------------------------------------------------------------------
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 equine-based conjugated estrogens
product for which the Company filed an Abbreviated New Drug Application
("ANDA") with the U.S. Food and Drug Administration ("FDA") in June
2003. The Company also entered into a Development, Manufacturing and
Distribution Agreement with Natural Biologics which could obligate the
Company to make milestone payments totaling an additional $35,000 to
Natural Biologics based on achieving certain legal and product approval
milestones, including FDA approval of a generic 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 a trade secret lawsuit brought by
Wyeth. In September 2003, the U.S. District Court for the District of
Minnesota determined that Natural Biologics had misappropriated Wyeth's
trade secrets and enjoined Natural Biologics from further involvement
in the equine-based raw material business. Unless the ruling is
reversed on appeal, the Company will be prohibited from using Natural
Biologics' raw material in its pending ANDA filed with the FDA. Natural
Biologics has informed the Company that it will seek an appeal of the
District Court's ruling.
As of September 30, 2003 and June 30, 2003, the Company had loaned
Natural Biologics approximately $15,729 and $14,408, respectively,
including accrued interest, under the Loan Agreement, and has included
such amounts in other assets on the consolidated balance sheets. Under
the terms of the Loan Agreement, the loans mature on June 3, 2007, are
collateralized by a security interest in inventory and certain other
assets of Natural Biologics and bear interest at the applicable federal
rate as defined by the Loan Agreement (3.39% at September 30, 2003).
Due to the unfavorable decision of the District Court and its
anticipated negative effects on Natural Biologics' operations, as well
as the uncertainty surrounding the timing and outcome of any appeal, on
September 30, 2003 the Company established a full valuation allowance
against the loan amount and included the allowance in other assets on
its consolidated balance sheet and recorded a charge to selling,
general and administrative expense.
10
Funding of Employee Savings Plan
On September 23, 2003, the Company committed to make a minimum
aggregate contribution of $11,000 to the Barr Laboratories, Inc.
Savings and Retirement Plan for the fiscal year ending June 30, 2004.
The Company has funded $3,749 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 terminate at various dates through 2006.
Product Liability Insurance
The Company is insured for $15,000 in potential product liability
claims under a finite risk insurance arrangement (the "Arrangement")
with a third party insurer. In exchange for $15,000 in product
liability coverage over a five-year term expiring on September 30,
2007, the Arrangement provides for the Company to pay approximately
$14,250 in four equal annual installments of $3,563. Included in the
initial installment payment was an insurer's margin of approximately
$1,050, which is being 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 is self-insured for potential product liability claims
between $15,000 and $25,000. The Company has purchased traditional
third-party insurance that will provide coverage for claims between
$25,000 and $40,000. For claims between $40,000 and $50,000, the
Company has purchased additional insurance that provides for the
Company to share 20% of all claims paid under the policy by the
insurer.
Simultaneously with entering into the Arrangement, the Company
exercised the extended reporting period under its previous insurance
policy that provides $10,000 of product liability coverage of unlimited
duration for product liability claims on products sold from September
10, 1987 to September 30, 2002. Additionally, in connection with its
merger with Duramed, the Company purchased a supplemental extended
reporting policy under Duramed's prior insurance policy that provides
$10,000 of product liability coverage for an unlimited duration for
product liability claims on products sold by Duramed between October 1,
1985 and October 24, 2001.
Because the Company is self-insured for a portion of its potential
product liability claims, it has established a self-insurance reserve.
As of September 30, 2003 and June 30, 2002 the Company included $1,753
and $1,333, respectively, in other accrued liabilities for its estimate
of potential product liability claims and expenses. For the three
months ended September 30, 2003 and 2002, approximately $420 and $0 is
included in selling, general and administrative expenses related to
changes in the accrual for both reported and potential
11
product liability claims and expenses. The cost of the ultimate
disposition of both existing and potential claims may differ from these
reserve amounts.
The Company has never been held liable for, or agreed to pay, a
significant product liability claim. However, the Company is from time
to time a defendant in several product liability actions. If the
Company incurs defense costs and liabilities in excess of the Company's
self-insurance reserve that are not otherwise covered by insurance, it
could have a material adverse effect on the Company's consolidated
financial statements.
Indemnity Provisions
From time-to-time, in the normal course of business, the Company agrees
to indemnify its suppliers and customers concerning product liability
and other matters.
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 approximately 38 class
action complaints filed in state and federal courts by direct and
indirect purchasers of Ciprofloxacin (Cipro(R)) from 1997 to the
present. The complaints allege that the 1997 Bayer-Barr patent
litigation settlement agreement was anti-competitive and violated
federal antitrust laws and/or state antitrust and consumer protection
laws. 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.
The lawsuits include nine consolidated in California state court, one
in Kansas state court, one in Wisconsin state court, one in Florida
state court, and two consolidated in New York state court, with the
remainder of the actions pending in the United States District Court
for the Eastern District of New York for coordinated or consolidated
pre-trial proceedings (the "MDL Case"). Fact discovery in the MDL Case
is currently scheduled to close on November 7, 2003, after which the
parties will proceed with expert discovery, followed by anticipated
summary judgment briefing. The direct purchaser and indirect purchaser
plaintiffs also have filed motions for class certification in the MDL
Case, but briefing is not complete and the Court has indicated that it
will defer ruling on the motions at the present time. The state court
actions remain in a relatively preliminary stage generally, tracked to
follow the MDL Case, although defendants have filed dispositive motions
and plaintiffs have moved for class certification in certain of the
cases.
On May 20, 2003, the District Court entered an order in the MDL Case
holding that the Barr-Bayer settlement did not constitute a per se
violation of the antitrust laws and restricting the scope of the legal
theories the plaintiffs could pursue in the case.
On September 19, 2003, the Circuit Court for the County of Milwaukee
dismissed the Wisconsin state class action for failure to state a claim
for relief under Wisconsin law. On October 17, 2003, the Supreme Court
of the State of New York for New York County dismissed the consolidated
New York state class action for failure to state a claim upon
12
which relief could be granted and denied the plaintiffs' motion for
class certification. The Wisconsin Circuit Court's decision and the New
York Supreme Court's decision do not affect the federal class actions
currently pending in the U.S. District Court for the Eastern District
of New York or the state class actions currently pending in other state
courts.
The Company believes that its agreement with Bayer Corporation reflects
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. The
Company anticipates that these matters may take several years to
resolve, but an adverse judgment in any of the pending cases could have
a material adverse impact on the Company's consolidated financial
statements.
Tamoxifen
To date approximately 31 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 alleging, among
other things, that the 1993 settlement of patent litigation between
Zeneca, Inc. and the Company violated the antitrust laws, insulated
Zeneca, Inc. and the Company from generic competition and enabled
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 Judicial Panel on Multidistrict Litigation has transferred these
cases to the United States District Court for the Eastern District of
New York for pretrial proceedings. On May 19, 2003, the District Court
entered judgment dismissing the cases for failure to state a viable
antitrust claim. Plaintiffs have filed a notice of appeal.
The Company believes that its agreement with Zeneca reflects 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 this
matter, the Company intends to vigorously defend itself. It is
anticipated that this matter may take several years to resolve, but an
adverse judgment could have a material adverse impact on the Company's
consolidated financial statements.
Invamed, Inc./Apothecon, Inc.
In February 1998, Invamed, Inc. and Apothecon, Inc., 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 the Company's raw material
supplier. Invamed and Apothecon have appealed the District Court's
decision to the United States Court of Appeals for the Second Circuit.
Trial on the merits has been stayed pending the outcome of the appeal.
13
The Company believes that the suits filed by Invamed and Apothecon are
without merit and intends to vigorously defend its position, but an
adverse judgment could have a material adverse impact on the Company's
consolidated financial statements.
Desogestrel/Ethinyl Estradiol Suit
In May 2000, the Company filed an 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 the
Company from marketing the tablet combination. In December 2001, the
United States District Court for the District of New Jersey granted
summary judgment in favor of the Company, finding that its product did
not infringe the patent at issue in the case. BTG appealed the District
Court's decision. In April 2002, the Company launched its Kariva(R)
product, the generic version of Mircette. In April 2003, the U.S. Court
of Appeals for the Federal Circuit reversed the District Court's
decision granting summary judgment in the Company's favor and remanded
the case to the District Court for further proceedings.
In July 2003 BTG (now Savient) filed an amended complaint adding
Organon (Ireland) Ltd. and Organon USA as plaintiffs and adding the
Company as a defendant. The amended complaint seeks damages and
enhanced damages based upon willful infringement. The Company believes
that it has not infringed BTG's patent and continues to manufacture and
market Kariva. If BTG and Organon are successful, the Company could be
liable for damages for patent infringement, which could have a material
adverse effect on its consolidated financial statements.
Termination of Solvay Co-Marketing Relationship
On March 31, 2002, the Company gave notice of its intention to
terminate, as of June 30, 2002, its relationship with Solvay
Pharmaceuticals, Inc. which covered the joint promotion of the
Company's Cenestin tablets and Solvay's Prometrium(R) capsules. Solvay
has disputed the Company's right to terminate the relationship and
claims it is entitled to substantial damages and has notified the
Company that it has demanded arbitration of this matter. Discovery is
underway and the arbitration hearing is currently scheduled to begin in
January 2004. The Company believes its actions are well founded but if
the Company is incorrect, an adverse decision in the matter could have
a material adverse impact on the Company's consolidated financial
statements.
Lemelson
In November 2001, the Lemelson Medical, Education & Research Foundation
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."
In March 2002, the court stayed the proceedings,
14
pending the resolution of another suit that involves the same patents,
but does not involve the Company.
Nortrel 7/7/7 Product Recall
On July 9, 2003, the Company initiated a recall of three lots of its
Nortrel 7/7/7 oral contraceptive product after receiving two customer
complaints that the tablets that had been dispensed to them were
misconfigured. The Company has since received reports of pregnancies
from approximately 25 women who claim to have taken the product, nine
of whom have requested compensation from the Company. The Company is in
the process of investigating whether these women have taken affected
product and whether their pregnancies are related to use of affected
product. The Company anticipates that one or more of these women will
commence formal legal actions against it. The Company does not have
sufficient information at this time to evaluate the likelihood of
success in these matters. However, an unfavorable outcome in one or
more of these matters could have a material adverse effect on the
Company's consolidated financial statements.
PPA Litigation
The Company is a defendant in three personal injury product liability
lawsuits involving phenylproanolamine ("PPA"). All three cases are in
their initial stages. The Company believes it has strong defenses to
all three cases and intends to vigorously defend against them. However,
an unfavorable outcome could have a material adverse effect on the
Company's consolidated financial statements.
MPA Litigation
The Company has been named as a defendant in at least 13 personal
injury product liability cases brought against the Company and other
manufacturers by plaintiffs claiming that they suffered injuries
resulting from the use of medroxyprogesterone acetate ("MPA") in
conjunction with Premarin or other hormone therapy products. These
cases are in a preliminary stage and the Company does not know whether
any of these individuals took an MPA product manufactured by the
Company. The Company intends to vigorously defend itself against these
cases. However, an unfavorable outcome could have a material adverse
effect on the Company's consolidated financial statements.
Texas HRT Cases
The Company's wholly owned Duramed subsidiary has been named, along
with several other pharmaceutical manufacturers, as a defendant in five
cases originally brought in Texas state court alleging personal
injuries to more than 70 plaintiffs from the use of hormone replacement
therapy ("HRT") products, including Premarin, Prempro, Estratest and
Estrace. None of the complaints in these cases specifically alleges
that any of the plaintiffs took any products manufactured by Duramed.
The cases have been removed to the United States District Court for the
Eastern District of Texas and the United States District Court for the
Southern District of Texas. The Company intends to vigorously defend
itself against these cases. However, an unfavorable outcome could have
a material adverse effect on the Company's consolidated financial
statements.
15
Medicaid Reimbursement Cases
The Company has been named as a defendant in separate actions brought
by the Commonwealth of Massachusetts; the County of Suffolk, New York;
the County of Rockland, New York; and Westchester County, New York
against numerous pharmaceutical manufacturers. The action seeks to
recover damages and other relief for alleged overcharges for
prescription medications paid for by Medicaid. The Company believes
that it has not engaged in any improper conduct and intends to
vigorously defend itself against the cases. However, an unfavorable
outcome could have a material adverse effect on the Company's
consolidated financial statements.
Other Litigation
As of September 30, 2003, the Company was involved with other lawsuits
incidental to its business, including patent infringement actions and
personal injury claims. Management of the Company, 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. 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
CID 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 believes that the patent challenge settlements being
investigated represent a pro-consumer and pro-competitive outcome to
the patent challenge cases. An investigation of the Tamoxifen
settlement by the U.S. Department of Justice and an investigation of
the Ciprofloxacin settlement by the Texas Attorney General's Office on
behalf of other state Attorneys General already have been
satisfactorily resolved without further action and the Company expects
these investigations to be satisfactorily resolved, as well. 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
16
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.
15. SUBSEQUENT EVENT
On October 24, 2003, at the Company's annual meeting of shareholders,
the Company's shareholders approved the reincorporation of the Company
from New York to Delaware and also approved an increase in the number
of authorized shares of common stock of the new Delaware corporation
from 100,000,000 shares to 200,000,000. The reincorporation merger is
expected to occur on December 31, 2003, at and after which time the
Company will be a Delaware corporation.
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 such as 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;
- the success of our product development activities;
- market and customer acceptance and demand for our
pharmaceutical products;
- our dependence on revenues from significant customers;
- reimbursement policies of third party payors;
- our dependence on revenues from significant products;
- 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;
18
- our mix of product sales between manufactured products, which
typically have higher margins, and distributed products, which
typically have lower margins, during any given period;
- the regulatory environment;
- our exposure to product liability and other lawsuits and
contingencies;
- the increasing cost of insurance and the availability of
product liability insurance coverage;
- our timely and successful completion of strategic initiatives,
including integrating companies and products we acquire and
implementing new enterprise resource planning systems;
- fluctuations in operating results, including the effects on
such results from spending for research and development, sales
and marketing activities and patent challenge activities; and
- other risks detailed from time to time in our filings with the
Securities and Exchange Commission.
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 our
reported results. The Securities and Exchange Commission 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 are less likely to 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 available at the
time the estimates and assumptions were made. Actual results may differ
significantly from our estimates and our estimates could be different using
different assumptions or conditions.
19
Sales Returns and Allowances
When we recognize revenue from the sale of our pharmaceutical products, we
simultaneously record estimates for product returns, rebates, chargebacks and
other sales allowances. These estimates serve to reduce our reported product
sales. 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 the actual return experience of that product
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. 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 or when market conditions indicate
that a shelf-stock adjustment is necessary to facilitate the sell-through of our
product. When determining whether to record an amount for a shelf-stock
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 and adjust, if applicable, our reserves and estimates as
additional information becomes available.
Accounts receivable are presented net of allowances related to the above
provisions of $125,037 at September 30, 2003 and $136,059 at June 30, 2003.
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 our
inventory for products close to expiration and therefore not expected to be
sold, for products that have reached their expiration date and for products that
are not expected to be saleable based on our quality assurance and control
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 properly stated at the lower of cost or market,
we consider such factors as the amount of product 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, expiration dates and market conditions on a regular basis. We
record provisions for inventory reserves as part of cost of sales.
20
Inventories are presented net of reserves of $16,159 at September 30, 2003 and
$13,201 at June 30, 2003.
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 sales forecasts 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, we will record a valuation allowance. If that
assessment changes, we would record a benefit on the consolidated 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.
Self-Insurance Reserve
We are primarily self-insured for potential product liability claims on products
sold on or after September 30, 2002. We maintain a self-insurance reserve, which
provides an estimate of our potential product liability claims. We develop this
estimate by assessing, on a case by case basis, our exposure from claims that
have been reported and by making an estimate of the future cost of incurred but
not reported ("IBNR") claims. In assessing the amounts to record for each
reported claim, with the assistance of counsel and insurance consultants, we
consider 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.
In determining the allowance for the estimated future cost of both reported and
IBNR claims as of June 30, 2003, we utilized projections of our outstanding
estimated losses as determined by an independent actuary.
As of September 30, 2003 and June 30, 2003 we included $1,753 and $1,333,
respectively, in other accrued liabilities for our estimate of potential claims
and expenses. For the three months ended September 30, 2003 and 2002,
approximately $420 and $0 were included in selling, general and administrative
expenses related to changes in the accrual for both reported and potential
product
21
liability claims. The costs of the ultimate disposition of both existing and
IBNR claims may differ from our reserve amounts.
Goodwill and Other Intangible Assets
In connection with acquisitions, we determine the amounts assigned to goodwill
and other 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. The valuation of intangible assets is generally based
on the estimated future 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 projected cash flows.
As required by SFAS No. 142, "Goodwill and Other Intangible Assets," we review
goodwill for impairment annually or more frequently if impairment indicators
arise.
As a result of our June 2002 purchase of certain assets and the assumption of
certain liabilities of Enhance Pharmaceuticals, Inc. (the "Enhance Purchase"),
we have included $14,118 of goodwill on our balance sheet as of September 30,
2003 and June 30, 2003.
As a result of the Enhance Purchase, our June 2003 acquisition of four products
from Wyeth and payments made for the license for SEASONALE(R), we have included
$44,880 and $45,949 as other intangible assets, net of accumulated amortization,
on our balance sheet as of September 30, 2003 and June 30, 2003, respectively
(see Note 9 to the consolidated financial statements).
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
Revenues -- Overview
Total revenues for the three months ended September 30, 2003 were $310,711, an
increase of 41% from $220,428 for the three months ended September 30, 2002. The
increase was the result of sales of our distributed version of Ciprofloxacin,
which we launched in June 2003, increased sales of our oral contraceptive
products, sales of Claravis(R) (a generic equivalent of Roche Pharmaceutical's
Accutane(R)) which we launched in May 2003, sales of products purchased from
Wyeth in June 2003, and increased sales of Cenestin. Partially offsetting these
increases were decreases in sales of Tamoxifen, our Dextro salt combo product (a
generic equivalent of Shire Richwood, Inc.'s Adderall(R)), and Warfarin Sodium.
Revenues -- Product Sales
On June 9, 2003, we began distributing Ciprofloxacin hydrochloride pursuant to a
license from Bayer, and recorded Ciprofloxacin sales of $114,746 for the three
months ended September 30, 2003. Under a 1997 settlement of a patent challenge
we initiated against Bayer's Cipro(R) antibiotic, we purchase Ciprofloxacin
products directly from Bayer that are manufactured under Bayer's New Drug
Application for Cipro and market them under our label. Under that
22
settlement, we were granted the non-exclusive right to distribute the
Ciprofloxacin products until Bayer's patent protecting Cipro expires in December
2003. We believe that Bayer intends to seek pediatric exclusivity for Cipro,
which, if granted, could delay the introduction of generic versions for six
months beyond the expiration of the patent. In September 2003, we signed an
amended supply agreement with Bayer that will enable us to continue to
distribute Ciprofloxacin during and after any period of pediatric exclusivity
that may be granted to Bayer. Bayer's pediatric exclusivity, if granted, would
expire on June 9, 2004. We share one-half of our profits from the sale of
Ciprofloxacin, as defined, with Aventis, the contractual successor to our joint
venture partner in the Cipro patent challenge case.
Sales of oral contraceptives increased $45,082 or 104% from $43,144 during the
three months ended September 30, 2002 to $88,226 during the three months ended
September 30, 2003. The increase in sales of our oral contraceptives reflects
increasing market shares for existing products and sales of six new oral
contraceptive products launched since September 30, 2002.
Sales of Cenestin, our plant-derived conjugated estrogen product, increased
approximately 43% from $10,259 for the three months ended September 30, 2002 to
$14,661 for the three months ended September 30, 2003. The increase in Cenestin
sales was driven in part by price increases over the last twelve months, as well
as by customer buying patterns. Based on current pricing and prescription data,
as reported by IMS, the Company estimates annual Cenestin sales of approximately
$42,000 to $45,000.
As expected, Tamoxifen sales decreased $72,816, or 96%, from $75,963 for the
three months ended September 30, 2002 to $3,147 for the three months ended
September 30, 2003. During the quarter ended September 30, 2002, Tamoxifen sales
were from our remaining distributed Tamoxifen inventory previously purchased
from AstraZeneca. AstraZeneca's pediatric exclusivity for its Nolvadex(R) brand
version of Tamoxifen ended on February 20, 2003, and we immediately launched our
manufactured Tamoxifen product. At the same time, several other generic
competitors launched Tamoxifen products, causing the price to decline and
causing us to lose market share.
Sales of our other products decreased approximately $1,370, or 2%, from $89,350
for the three months ended September 30, 2002 to $87,980 for the three months
ended September 30, 2003. Contributing to this decline were lower sales of our
Dextro salt combo product, which experienced lower prices and market share as
the result of the launch of additional competing generic products, and lower
sales of Warfarin sodium, which we believe can be attributed to customer buying
patterns. Partially offsetting these declines were sales from four products we
purchased from Wyeth and from sales of Claravis(R).
Revenues -- Development and Other Revenue
For the three months ended September 30, 2002 and 2003, development and other
revenue 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.
23
Cost of Sales
Cost of sales increased 45% from $110,919 for the three months ended September
30, 2002 to $160,901 for the three months ended September 30, 2003, primarily
due to increased sales. As a percentage of product sales, cost of sales
increased slightly from 51% for the three months ended September 30, 2002 to 52%
for the three months ended September 30, 2003. Improved margins on sales of our
oral contraceptives and a larger percentage of product sales from our higher
margin products were substantially offset by lower margins on sales of our
distributed Ciprofloxacin products. Ciprofloxacin accounted for a larger
percentage of total product sales for the three months ended September 30, 2003
than the percentage of total product sales from Tamoxifen during the three
months ended September 30, 2002. The margins on sales of Ciprofloxacin were
lower than the margins on sales of Tamoxifen due to the sharing of Ciprofloxacin
profits with Aventis.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 109% from $31,312 for the
three months ended September 30, 2002 to $65,541 for the three months ended
September 30, 2003. The increase was due in part to the $15,729 valuation
allowance we established in September 2003 for our loans to Natural Biologics,
LLC, the raw material supplier for our generic equine-based conjugated estrogens
product, as the result of an unfavorable court decision rendered in September
2003 (see Note 14 to the consolidated financial statements). We also
substantially increased our marketing and selling expenses for proprietary
products, including higher costs associated with the March 2003 expansion of our
Women's Healthcare Sales Force from 132 to 250 sales representatives and
pre-launch costs for SEASONALE(R). The remainder of the increase was primarily
due to (1) higher costs associated with business development activities, (2)
increased legal costs that include patent challenge activities, class action
lawsuits and other matters, and (3) higher workforce costs to support the
Company's growth.
Research and Development
Research and development expenses increased 11% from $21,138 for the three
months ended September 30, 2002 to $23,466 for the three months ended September
30, 2003. The increase reflected higher costs associated with increased product
development costs, including raw material purchases, and headcount and related
costs associated with other product development activities.
Proceeds from Patent Challenge Settlement
For the three months ended September 30, 2002, proceeds from patent challenge
settlement represent amounts earned under the terms of the supply agreement
entered into with Bayer to settle our patent challenge litigation regarding
Bayer's Cipro antibiotic. Under the terms of the supply agreement, Bayer, at its
option, was required to either allow us to purchase Cipro from it at a
predetermined discount or to make quarterly cash payments to us. Until June
2003, Bayer elected to make payments to us rather than supply us with Cipro.
Accordingly, we recognized proceeds from patent challenge settlements of $8,563
and $0 for the three months ended September 30, 2002 and 2003, respectively.
24
Interest Income
Interest income decreased 16% from $1,497 for the three months ended September
30, 2002 to $1,260 for the three months ended September 30, 2003, primarily due
to a decrease in market interest rates on our short term investments.
Interest Expense
Interest expense increased 87% from $448 for the three months ended September
30, 2002 to $839 for the three months ended September 30, 2003, primarily due to
a decrease in the amount of interest being capitalized partially offset by a
decrease in principal on outstanding debt and capital leases.
Income Taxes
Our income tax provision for the three months ended September 30, 2002 reflected
a 37.25% effective tax rate on pre-tax income, compared to 37.00% for the three
months ended September 30, 2003. The decrease in the effective tax rate is
primarily due to an increase in the amount of tax credits that the Company
expects to realize in the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance increased $50,913, or 14%, from $367,142
at June 30, 2003, to $418,055 at September 30, 2003. In addition, our marketable
securities increased $8,739 from $44,455 at June 30, 2003 to $53,194 at
September 30, 2003. Our primary source of cash is funds from operations, and our
primary uses of cash are for operating expenses and capital expenditures.
Operating Activities
Cash provided by operating activities was $65,034 for the three months ended
September 30, 2003, driven by net earnings of $38,535, a non-cash charge of
$15,729 for the provision for losses on loans and accrued interest owed to us by
Natural Biologics, and a $12,429 tax benefit resulting from the exercise of
stock options, which more than offset an increase in working capital. Working
capital, defined as current assets (excluding cash and cash equivalents) less
current liabilities, increased by $24,507 as changes in accounts payable,
marketable securities and prepaid expenses more than offset changes in accounts
receivable, other receivables and accrued liabilities. The $113,119 decrease in
accounts payable is due primarily to a reduction in the payable owed to Bayer
for purchases of Ciprofloxacin. The $17,000 increase in marketable securities is
due to the purchase of additional market auction debt securities and the
reclassification of individual securities which mature in three months or less
from long-term to short-term. The $6,254 increase in prepaid expenses is due
primarily to our commitment to make minimum matching contributions to the
savings and retirement plan during fiscal 2004. Accounts receivable decreased
$80,862 due primarily to the timing of our sales of Ciprofloxacin. We launched
Ciprofloxacin on June 9, 2003, and recorded $111,379 in sales from launch to
June 30, 2003. Accounts receivable at June 30, 2003 included all of those sales,
and the terms we extended for those sales for which payment was collected prior
to September 30, 2003. Other receivables decreased $18,102, primarily due to the
receipt of payments due from Bayer under our supply
25
agreement. Accrued liabilities increased $12,029, primarily as the result of the
commitment to fund the savings and retirement plan as previously discussed.
We expect cash flows in fiscal 2004 to be favorably impacted by approximately
$11,000 as a result of the continued utilization of federal and state net
operating losses incurred by Duramed Pharmaceuticals, Inc. prior to our merger
in October 2001. 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.
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
2004, 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 facilities
necessary to meet the expected future growth of the Company.
During the three months ended September 30, 2003, we invested $13,439 in capital
assets and expect our capital expansion program will continue at a level of
between $50,000 and $90,000 annually for the next few years. This estimate
includes substantially completing the multi-year capital expansion programs
noted above, as well as implementing a new enterprise resource planning system.
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 fiscal 2002, we entered into a Loan and Security Agreement (the "Loan
Agreement") with Natural Biologics, LLC ("Natural Biologics"), the raw material
supplier for our generic equine-based conjugated estrogens product for which we
filed an Abbreviated New Drug Application ("ANDA") with the FDA in June 2003.
Under the terms of the Loan Agreement, we may provide additional loans to
Natural Biologics of $7,009 in fiscal 2004 and $2,773 in fiscal 2005. Whether we
provide these loans depends on the successful outcome of Natural Biologics'
appeal of a September 2003 decision of the United States District Court for the
District of Minnesota finding that Natural Biologics had misappropriated certain
trade secrets from Wyeth. Unless the decision is reversed on appeal, we will be
prohibited from using Natural Biologics' raw material in our ANDA filed with the
FDA.
In fiscal 2002, we 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 September 30, 2003, we have invested $53,100 in market auction debt
securities that are readily convertible into cash at par value with maturity
dates ranging from November 12, 2003 to August 3, 2005. We may continue to
invest in extended maturity securities based on operating needs and strategic
opportunities.
26
As part of our continuing efforts to identify new products, new technologies and
licensing opportunities, on October 7, 2003 we signed a commitment to enter into
a Limited Partnership Agreement (the "Agreement") with NewSpring Ventures, L.P.
(the "Fund"), a Small Business Investment Corporation that provides venture
capital to development stage companies. We have committed, upon final approval
of the Small Business Administration, up to $15,000 to the Fund for investments
in healthcare companies, as defined in the Agreement. Upon approval, we will
contribute $1,500, or 10% of our total commitment, to the Fund, as required by
the Agreement. Our remaining commitment is subject to call upon ten days notice
from the Fund, at any time prior to the expiration of the Agreement on August
18, 2009. In addition, we are currently evaluating a commitment of up to $15,000
in another healthcare venture fund and may finalize this commitment by December
31, 2003.
Financing Activities
Debt balances decreased by approximately $475 during the three months ended
September 30, 2003 due to debt repayments. Scheduled principal repayments on our
existing debt will be approximately $8,510 in fiscal 2004. We have a $40,000
revolving credit facility that expires on February 27, 2005. We currently have
approximately $32,875 available under this facility due to the issuance of a
$7,125 letter of credit in support of outstanding premiums on our product
liability insurance, as discussed below.
There are warrants outstanding to purchase 2,250,000 shares of our common stock
that expire in March 2004. The warrants were granted in fiscal 2000 as part of a
strategic transaction with Bristol-Myers Squibb. The exercise price for all such
warrants is substantially below the current market price of our common stock. As
such, we would anticipate that all or substantially all of these warrants will
be exercised prior to their expiration. Warrants for approximately 1,125,000
shares have a "cashless" exercise feature, meaning the warrants could be
exercised without cash payments to us by reducing the number of shares issued to
the exercising holder (with such reduced number of shares based on the aggregate
exercise price for the warrants). Warrants for the remaining 1,125,000 shares
require cash payments for their exercise. If exercised in full, and based on
current stock price levels, these warrants would provide us with cash proceeds
of approximately $26,000 and a tax benefit of approximately $15,000 to $25,000
depending upon the market price of our stock on the date that the warrants are
exercised.
Product Liability Insurance
We are insured under a finite risk insurance arrangement (the "Arrangement")
with a third party insurer. 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. Included in
the initial payment was an insurer's margin of approximately $1,050, which is
being amortized over the five-year term. 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. See
Note 14 to the consolidated financial statements for a full description of our
product liability insurance coverage.
27
Funding of Employee Savings Plan
On September 23, 2003, we committed to make a minimum aggregate contribution of
$11,000 to the Barr Laboratories, Inc. Savings and Retirement Plan for the
fiscal year ending June 30, 2004. We have funded $3,749 of the contribution
commitment and have recorded an asset and a matching liability equal to the
remaining contribution commitment.
Strategic Transactions
To expand our business opportunities, we have increased our business development
activities and continue to evaluate and enter into various strategic
collaborations or acquisitions, including those described below.
Letters of Intent with Galen (Chemicals) Limited
On September 10, 2003, we signed a letter of intent to acquire from Galen
(Chemicals) Limited ("Galen") the exclusive rights to market in the United
States and Canada for Loestrin(R) and Loestrin(R) Fe oral contraceptive
products. The proposed transaction would also include a settlement of pending
litigation between ourselves and Galen regarding Galen's FemHRT(R) hormone
therapy and Estrostep(R) oral contraceptive products that would allow us to
launch generic versions of those products six months prior to patent expiry.
Under the terms of the letter of intent, we would acquire from Galen the
exclusive rights to manufacture and market Loestrin products in the United
States and Canada. Also under the letter of intent, Galen would grant us a
non-exclusive license to launch a generic version of FemHRT six months prior to
patent expiry. Galen would also grant us a non-exclusive license to launch a
generic version of Estrostep six months prior to patent expiry. Finally, we
would receive an exclusive royalty-bearing license to develop certain oral
contraceptives under a patent owned by Galen. In consideration of these rights
and assets, we would make a one-time payment of approximately $45,000 to Galen.
On September 10, 2003, we signed a separate letter of intent which provides for
us to grant Galen an option to acquire an exclusive license for our generic
version of Galen's Ovcon(R) 35 oral contraceptive for which we have a
pending ANDA. Under the terms of the option agreement, we would grant Galen an
option to acquire an exclusive license under Barr's ANDA for Ovcon 35, which is
currently pending at the FDA. Within 30 days of FDA approval of our ANDA for
Ovcon, Galen would have the right to exercise its option. If Galen exercises its
option, it would be granted a five-year exclusive license under our ANDA to sell
the product. At the end of the five-year term, we would grant Galen a
non-exclusive license to continue selling the product. In consideration of this
transaction, Galen would pay us $1,000 at the time of the grant of the option
and $19,000 at the time the exclusive license agreement is signed.
The transactions with Galen are subject to the negotiation of definitive
agreements, completion of due diligence procedures and other conditions,
including the final approval by our and Galen's Boards of Directors. We intend
to close these transactions with Galen by December 31, 2003.
28
Letter of Intent to Acquire Plan B(R) Emergency Oral Contraceptive
During October, 2003, we announced that we signed a letter of intent to acquire
the emergency oral contraceptive, Plan B(R), and certain other assets and
liabilities of the Women's Capital Corporation (WCC), a privately held company,
for a cash payment of $13,000 plus the assumption of approximately $9,000 in
liabilities. Approximately $6,500 of the cash payment will be due on the closing
date of the transaction, with the remaining $6,500 in the form of a promissory
note, with interest, due four years from the closing date of the transaction.
This transaction is subject to certain conditions, including the negotiation of
definitive agreements. We intend to close our transaction with WCC by December
31, 2003.
Other Strategic Transactions
In addition to the transactions described above, we are currently evaluating
other strategic transactions, ranging from product development and license
agreements to asset or corporate acquisitions. The costs and related cash
expenditures to evaluate these opportunities may be significant, even if a
transaction is not completed, and could negatively impact our earnings in a
given quarter. In addition, completed transactions may require cash payments and
could result in charges for items such as the write off of in-process research
and development costs. The timing of potential transactions, the amounts
required to complete potential transactions and any charges that may result from
potential transactions are difficult to predict.
Merger-Related Costs
On October 24, 2001, we completed our merger with Duramed. In connection with
the transaction, we incurred approximately $31,449 in direct transaction costs
such as legal and accounting costs, costs associated with facility and product
rationalization and severance costs. As of September 30, 2003, all of the direct
transaction costs and involuntary termination benefits had been paid and charged
against the liability leaving a remaining liability of approximately $578
related to facility costs.
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 fund our operations and to capitalize on certain
strategic opportunities as they arise. 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.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements, other than operating leases
in the normal course of business.
29
RECENT ACCOUNTING PRONOUNCEMENTS
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. SFAS 149 clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in SFAS No. 133, clarifies when a
derivative contains a financing component, amends the definition of an
"underlying" to conform it to the language used in FASB Interpretation No. 45,
"Guarantor Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," and amends certain other
existing pronouncements. We currently have no derivative financial instruments,
and the adoption of SFAS 149 on July 1, 2003 did not have a material impact on
our consolidated financial statements.
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
SFAS 150 modifies the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. SFAS 150 requires that
those instruments be classified as liabilities in statements of financial
position and affects an issuer's accounting for (1) mandatorily redeemable
shares, which the issuing company is obligated to buy back in exchange for cash
or other assets, (2) instruments, other than outstanding shares, that do or may
require the issuer to buy back some of its shares in exchange for cash or other
assets, or (3) obligations that can be settled with shares, the monetary value
of which is fixed, tied solely or predominantly to a variable such as a market
index, or varies inversely with the value of the issuer's shares. In addition to
its requirements for the classification and measurement of financial instruments
within its scope, SFAS 150 also requires disclosures about alternative ways of
settling those instruments and the capital structure of entities, all of whose
shares are mandatorily redeemable. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We adopted SFAS 150 on July 1, 2003 with no material impact on our
consolidated financial statements.
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 $471,249 and debt instruments of
approximately $42,062. We do not use derivative financial instruments.
Our investment portfolio consists of cash and cash equivalents and market
auction debt 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
debt securities, including U.S. government, state and local government and
corporate obligations, certificates of deposit and money market funds.
Approximately 90% of our portfolio matures in less than three months. The
carrying value of the investment portfolio approximates the market value
30
at September 30, 2003 and the value at maturity. Because our investments consist
of cash equivalents and market auction debt securities, a hypothetical 100 basis
point change in interest rates is not likely to have a material effect on our
consolidated financial statements.
Approximately 66% of our debt instruments at September 30, 2003 are subject to
fixed interest rates and principal payments. 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 and the note rates. The remaining 34% of debt instruments are
primarily subject to variable interest rates based on the prime rate or LIBOR
and have fixed principal payments. The fair value of all debt instruments was
approximately $40,000 at September 30, 2003. 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. As of September 30, 2003, there was approximately
$32,875 available under this facility due to the issuance of a $7,125 letter of
credit in support of our finite risk insurance program. We do not believe that
any market risk inherent in our debt instruments is likely to have a material
effect on our consolidated financial statements.
As of September 30, 2003, we had approximately $14,400 of variable rate debt
outstanding. A hypothetical 100 basis point increase in interest rates, based on
the September 30, 2003 balance, would reduce our annual net income by
approximately $91. Any future gains or losses may differ materially from this
hypothetical amount based on the timing and amount of actual interest rate
changes and the actual term loan balance.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure 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.
At the conclusion of the period ended September 30, 2003, 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 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.
31
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.
32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Patent Challenge Litigation
Alendronate Sodium (Fosamax(R))
In June 2001, we filed an ANDA seeking approval from the FDA to market
alendronate sodium 70 mg tablets, the generic equivalent of Merck's Fosamax 70
mg tablets. We notified Merck pursuant to the provisions of the Hatch-Waxman Act
and, in August 2001, Merck filed identical patent infringement actions in
the United States District Courts for the District of Delaware and the Southern
District of New York, seeking to prevent us from marketing alendronate sodium 70
mg tablets until 2018 when the last of certain U.S. patents is alleged to
expire. In January 2002, the Delaware action was dismissed based on a lack of
personal jurisdiction over us. We answered the New York action.
In August 2001, we filed an ANDA seeking approval from the FDA to market
alendronate sodium 35 mg tablets, the generic equivalent of Merck's Fosamax 35
mg tablets. We notified Merck pursuant to the provisions of the Hatch-Waxman Act
and, in December 2001, Merck filed a patent infringement action in the United
States District Court for the District of Delaware, seeking to prevent us from
marketing alendronate sodium 35 mg tablets until 2018 when the last of certain
U.S. patents is alleged to expire. In December 2001, Merck filed an identical
patent infringement action in the United States District Court for the Southern
District of New York. On January 29, 2002, Merck voluntarily dismissed the
Delaware action. We answered the New York action.
In January 2002, the District Court in New York consolidated the cases involving
the 70 mg and 35 mg alendronate sodium products for all purposes. In November
2002, the United States District Court for the District of Delaware issued a
decision in an action brought by Merck against Teva Pharmaceuticals arising out
of the filing of an ANDA by Teva for alendronate sodium 5 mg, 10 mg and 40 mg
daily tablets. The District Court ruled that U.S. patent 4,621,077 was not
invalid, was infringed by Teva's ANDA filing, and was properly extended. In
December 2002, Merck and Teva tried another case in the United States District
Court for the District of Delaware arising from the filing of Teva's ANDA for
Alendronate Sodium 35 mg and 70 mg weekly tablets, involving U.S. patent
5,994,329. No decision has been entered in the case.
In March 2003, we entered into an agreement with Merck to: (1) stay further
proceedings in the case involving our challenge to Merck's Fosomax patents,
subject to certain conditions, pending the entry of final judgments in the
litigation between Merck and Teva; and (2) each be bound, with certain limited
exceptions, by such judgments. That agreement was entered as an order of the
Court in March 2003.
On October 30, 2003, the U.S. Court of Appeals for the Federal Circuit affirmed
the District Court's decision that U.S. patent 4,621,077 was not invalid, was
infringed by Teva's ANDA filing, and was properly extended. Under this decision,
we and Teva will be unable to obtain
33
FDA approval of an alendronate sodium product until the patent expires in
February 2008, even if Teva is successful in its challenge to U.S. patent
5,994,329.
Mirtazapine Orally Disintegrating (Remeron(R) Soltabs(TM))
We previously disclosed this case in our annual report on Form 10-K for the year
ended June 30, 2003 as filed with the SEC on August 26, 2003 and as amended on
August 29, 2003. On September 30, 2003, the court granted Akzo Nobel's and
Organon's motion to dismiss the declaratory judgment counterclaims without
prejudice, effectively ending the current litigation.
Norgestimate / Ethinyl Estradiol Triphasic (Ortho Tri-Cyclen Lo(R))
In June 2003, we filed an ANDA seeking approval from the FDA to market certain
norgestimate and ethinyl estradiol tablets in a 28 day regimen, the generic
equivalent of Ortho-McNeil's ("Ortho") Ortho Tri-Cyclen Lo(R) oral contraceptive
product. We notified Ortho and Johnson & Johnson Pharmaceutical Research &
Development, LLC pursuant to the provisions of the Hatch-Waxman Act on August
25, 2003. On October 1, 2003 Ortho and Johnson & Johnson Pharmaceutical Research
& Development, LLC filed a suit in the United States District Court for the
District of New Jersey - Trenton Division for infringement of several patents,
seeking to prevent us from marketing the norgestimate and ethinyl estradiol
tablets until after the expiration of U.S. Patent No. 6,214,815, which is
alleged to expire in 2019. On October 14, 2003, we answered the complaint and
asserted a counterclaim that the claims of this patent are invalid. Discovery
has not yet begun.
We believe that we were the first to file an ANDA for Ortho Tri-Cyclen Lo(R). If
so, we may be eligible for 180 days of generic exclusivity, depending on a
variety of factors.
Norethindrone Acetate / Ethinyl Estradiol (Estrostep(R)) and Norethindrone
Acetate / Ethinyl Estradiol (Estrostep FE(R))
We previously disclosed these cases in our annual report on Form 10-K for the
year ended June 30, 2003 as filed with the SEC on August 26, 2003 and as amended
on August 29, 2003. On September 10, 2003, we entered into a letter of intent
with Galen (Chemicals) Limited that, among other things, would result in a
settlement of the litigation. The settlement is subject to the parties
executing final settlement agreements, completion of due diligence and other
conditions, including final approval by the Boards of Directors of both parties.
We intend to close the transaction by December 31, 2003.
Norethindrone Acetate / Estradiol (FemHRT(R))
We previously disclosed this case in our annual report on Form 10-K for the year
ended June 30, 2003 as filed with the SEC on August 26, 2003 and as amended on
August 29, 2003. On September 10, 2003, we entered into a letter of intent with
Galen (Chemicals) Limited that, among other things, would result in a settlement
of the litigation. The settlement is subject to the parties executing final
settlement agreements, completion of due diligence and other conditions,
including final approval by the Boards of Directors of both parties. We intend
to close the transaction by December 31, 2003.
34
Class Action Lawsuits
Ciprofloxacin
We previously disclosed these cases in our annual report on Form 10-K for the
year ended June 30, 2003 as filed with the SEC on August 26, 2003 and as amended
on August 29, 2003. On September 19, 2003, the Circuit Court for the County of
Milwaukee dismissed the Wisconsin state class action for failure to state a
claim for relief under Wisconsin law. On October 17, 2003, the Supreme Court of
the State of New York for New York County dismissed the consolidated New York
state class action for failure to state a claim upon which relief could be
granted and denied the plaintiffs' motion for class certification. The Wisconsin
Circuit Court's decision and the New York Supreme Court's decision do not affect
the federal class actions currently pending in the U.S. District Court for the
Eastern District of New York or the state class actions currently pending in
other state courts.
Other Litigation
Adderall Trade Dress Infringement Suit
We previously disclosed this case in our annual report on Form 10-K for the year
ended June 30, 2003 as filed with the SEC on August 26, 2003 and as amended on
August 29, 2003. On October 30, 2003, we agreed with Shire US, Inc. to settle
the matter and terminate the litigation.
Medicaid Reimbursement Cases
In addition to the Medicaid Reimbursement cases previously disclosed in our
annual report on Form 10-K for the year ended June 30, 2003 as filed with the
SEC on August 26, 2003 and as amended on August 29, 2003, we have been named as
a defendant in separate actions brought by the County of Rockland, New York and
by the Commonwealth of Massachusetts against numerous pharmaceutical
manufacturers. The actions seek to recover damages and other relief for alleged
overcharges for prescription medications paid for by Medicaid. We believe that
we have not engaged in any improper conduct and intend to vigorously defend
against the cases. However, an unfavorable outcome could have a material adverse
effect on our consolidated financial statements.
Texas HRT Cases
Duramed, our wholly-owned subsidiary, has been named along with several other
pharmaceutical manufacturers, as a defendant in five cases originally brought in
Texas state court alleging personal injuries to more than 70 plaintiffs from the
use of hormone replacement therapy ("HRT") products, including Premarin,
Prempro, Estratest and Estrace. None of the complaints in these cases
specifically alleges that any of the plaintiffs took any products manufactured
by Duramed. The cases have been removed to the United States District Court for
the Eastern District of Texas and the United States District Court for the
Southern District of Texas. We intend to vigorously defend against these cases.
However, an unfavorable outcome could have a material adverse effect on our
consolidated financial statements.
35
Other Matters
As of September 30, 2003, we were involved with other lawsuits incidental to our
business, including patent infringement actions and personal injury claims.
Based on the advice of legal counsel, we believe that the ultimate disposition
of such other lawsuits will not have a material adverse effect on our
consolidated financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Amended and Restated Employment Agreement, dated October 24,
2002, between Barr Laboratories, Inc. and Bruce L. Downey.
10.2 Amended and Restated Employment Agreement, dated October 24,
2002, between Barr Laboratories, Inc. and Paul M. Bisaro.
10.3 Amended and Restated Employment Agreement, dated October 24,
2002, between Barr Laboratories, Inc. and Carole S.
Ben-Maimon.
10.4 Agreement between Barr Laboratories, Inc. and Martin Zeiger,
dated July 30, 2003.
31.1 Certification of Bruce L. Downey pursuant to Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of William T. McKee pursuant to Exchange Act
Rules 13a-14(a) and 31.2 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.0 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) We filed or furnished the following reports on Form 8-K in the
quarter ended September 30, 2003.
REPORT DATE ITEM REPORTED
August 7, 2003 Press release announcing results for fiscal
year 2003 and fourth quarter 2003.
September 16, 2003 Press release regarding the ruling by the
U.S. District Court for the District of
Minnesota in the suit between Natural
Biologics, LLC and Wyeth.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARR LABORATORIES, INC.
Dated: November 6, 2003 /s/ William T. McKee
--------------------
William T. McKee
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
37