UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended December 31, 2004 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 PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 42-1612474
(State or Other Jurisdiction of (I.R.S. - Employer
Incorporation or Organization) Identification No.)
400 CHESTNUT RIDGE ROAD, WOODCLIFF LAKE, NEW JERSEY 07677-7668
(Address of principal executive offices)
201-930-3300
(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 January 31, 2005: 102,627,448
1
BARR PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements............................
Consolidated Balance Sheets as of December 31, 2004
(unaudited) and June 30, 2004............................. 3
Consolidated Statements of Operations (unaudited) for the
three months and six months ended December 31, 2004
and 2003.................................................. 4
Consolidated Statements of Cash Flows (unaudited) for the
six months ended December 31, 2004 and 2003............... 5
Notes to Consolidated Financial Statements (unaudited)....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 27
Item 4. Controls and Procedures...................................... 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................ 29
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds........................................... 29
Item 4. Submission of Matters to a Vote of Security Holders.......... 29
Item 6. Exhibits..................................................... 30
Signatures................................................... 31
2
BARR PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
2004 JUNE 30,
(UNAUDITED) 2004
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 456,035 $ 419,878
Marketable securities 21,455 32,376
Accounts receivable, net of reserves of $152,693 and $141,873, at
December 31, 2004 and June 30, 2004, respectively 127,623 153,890
Other receivables 11,955 60,848
Inventories, net 151,136 150,252
Deferred income taxes 46,031 46,077
Prepaid expenses and other current assets 21,671 14,925
---------- ----------
Total current assets 835,906 878,246
Property, plant and equipment, net of accumulated depreciation of $119,526
and $106,647, at December 31, 2004 and June 30, 2004, respectively 246,182 236,831
Deferred income taxes 34,952 35,016
Marketable securities 103,186 89,143
Other intangible assets 105,507 64,897
Goodwill 18,096 18,211
Other assets 8,549 10,925
---------- ----------
Total assets $1,352,378 $1,333,269
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 40,129 $ 61,089
Accrued liabilities 109,743 117,970
Current portion of long-term debt and capital lease obligations 7,029 8,447
Income taxes payable 56,935 20,139
---------- ----------
Total current liabilities 213,836 207,645
Long-term debt and captial lease obligations 27,016 32,355
Other liabilities 31,161 51,223
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 200,000,000;
issued 105,534,037 and 104,916,103, at December 31, 2004
and June 30, 2004, respectively 1,055 1,049
Additional paid-in capital 404,602 377,024
Retained earnings 776,203 664,681
Accumulated other comprehensive loss (805) --
---------- ----------
1,181,055 1,042,754
---------- ----------
Treasury stock at cost: 2,972,997 and 420,597 shares, at
December 31, 2004 and June 30, 2004, respectively (100,690) (708)
---------- ----------
Total shareholders' equity 1,080,365 1,042,046
---------- ----------
Total liabilities and shareholders' equity $1,352,378 $1,333,269
========== ==========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BARR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues:
Product sales $255,793 $369,862 $498,792 $678,622
Development and other revenue 1,576 4,262 3,085 6,213
-------- -------- -------- --------
Total revenues 257,369 374,124 501,877 684,835
Costs and expenses:
Cost of sales 78,059 207,722 147,697 368,623
Selling, general and administrative 58,385 53,961 122,715 119,502
Research and development 31,137 63,093 59,651 86,559
-------- -------- -------- --------
Earnings from operations 89,788 49,348 171,814 110,151
Interest income 2,197 1,381 3,977 2,641
Interest expense 484 661 1,064 1,500
Other income (expense) 278 (889) 268 (947)
-------- -------- -------- --------
Earnings before income taxes 91,779 49,179 174,995 110,345
Income tax expense 32,392 14,110 63,473 36,741
-------- -------- -------- --------
Net earnings $ 59,387 $ 35,069 $111,522 $ 73,604
======== ======== ======== ========
Earnings per common share - basic $ 0.58 $ 0.35 $ 1.08 $ 0.73
======== ======== ======== ========
Earnings per common share - diluted $ 0.56 $ 0.33 $ 1.05 $ 0.69
======== ======== ======== ========
Weighted average shares 102,526 100,806 103,409 100,596
======== ======== ======== ========
Weighted average shares - diluted 105,144 106,560 106,028 106,193
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
BARR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $111,522 $ 73,604
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 21,210 15,143
Provision for losses on loans to Natural Biologics 700 15,729
Loss on disposal of property, plant & equipment 197 7,126
Other (1,227) 833
Tax benefit of stock incentive plans 20,195 14,491
Write-off of acquired in-process research and development -- 35,600
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net 75,160 44,630
Inventories (884) 11,791
Prepaid expenses (738) (4,269)
Other assets 6,523 (1,710)
Increase (decrease) in:
Accounts payable, accrued liabilities and other liabilities (54,753) (61,255)
Income taxes payable 36,796 (8,195)
-------- --------
Net cash provided by operating activities 214,701 143,518
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (24,875) (20,844)
Buy-out of product royalty (19,250) --
Acquisitions (27,000) (35,600)
Investment in venture funds (4,470) (3,480)
Other (3,395) (5,553)
-------- --------
Net cash used in investing activities (78,990) (65,477)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases (6,961) (6,964)
Purchase of treasury stock (99,982) --
Proceeds from exercise of stock options and employee stock purchases 7,389 14,619
-------- --------
Net cash (used in) provided by financing activities (99,554) 7,655
-------- --------
Increase in cash and cash equivalents 36,157 85,696
Cash and cash equivalents at beginning of period 419,878 367,142
-------- --------
Cash and cash equivalents at end of period $456,035 $452,838
======== ========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period:
Interest, net of portion capitalized $ 991 $ 1,556
======== ========
Income taxes $ 6,482 $ 27,731
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
BARR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements should be read in
conjunction with the Consolidated Financial Statements of Barr Pharmaceuticals,
Inc. and Subsidiaries ("the Company") and related notes that are contained in
the Company's Annual Report on Form 10-K for its fiscal year ended June 30,
2004. The unaudited interim financial statements contained in this report
include all adjustments (consisting of normal recurring adjustments) and
accruals necessary in the judgment of management for a fair presentation of such
statements.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123(R), "Share-Based
Payment," which replaces SFAS 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), and supersedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." ("APB No. 25"). SFAS 123(R) requires
companies to recognize in their income statement the grant-date fair value of
stock options and other equity-based compensation issued to employees. This SFAS
is effective for most public companies for interim and annual reporting periods
beginning after June 15, 2005. Grant-date fair value will be determined using
one of two acceptable valuation models. This Standard requires that compensation
expense for most equity-based awards be recognized over the requisite service
period, usually the vesting period; while compensation expense for
liability-based awards (those usually settled in cash rather than stock) be
re-measured to fair-value at each balance sheet date until the award is settled.
The Standard also provides guidance as to the accounting treatment for income
taxes related to such compensation costs as well as transition issues related to
adopting the new Standard. The Company has been using the intrinsic value method
as set forth under APB No. 25 with no stock-based compensation cost reflected in
net earnings while complying with footnote disclosure requirements of SFAS No.
123 setting forth the pro forma effect on net earnings of applying fair value
recognition to stock based awards. The Company is currently evaluating the
requirements of SFAS 123(R).
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets
an amendment of APB Opinion No. 29". This Statement precludes companies from
using the "similar productive assets" criteria to account for nonmonetary
exchanges at book value with no gain or loss being recognized. Effective for
fiscal periods beginning after June 15, 2005, all companies will be required to
use fair value for most nonmonetary exchanges, recognizing gain or loss, if the
transaction meets a commercial-
6
substance criteria. The Company does not expect this Standard to have a
significant impact on its current consolidated financial statements.
In November 2004, the FASB issued Statement No. 151, "Inventory Costs, an
amendment of ARB 43, Chapter 4" ("SFAS 151"), to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage). ARB 43 allowed some of these "abnormal costs" to be
carried as inventory whereas the new Standard requires that these costs be
recognized in income as incurred. This Statement is effective for fiscal years
beginning after June 15, 2005. The Company is currently evaluating what effect,
if any, this standard will have on its current consolidated financial
statements.
In December 2004, the FASB issued FSP FAS 109-1, "Application of FASB Statement
No. 109, "Accounting for Income Taxes," to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004" to
provide accounting guidance on the appropriate treatment of tax benefits
generated by the enactment of the Act. The FSP requires that the manufacturer's
deduction be treated as a special deduction in accordance with SFAS 109 and not
as a tax rate reduction. The Company is awaiting final tax regulations from the
IRS before completing its assessment of the impact of adopting FSP FAS 109-1 on
its current consolidated financial statements.
3. 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 presently accounts for these plans under the intrinsic value method
as described in APB No. 25. The Company, applying the intrinsic value method,
has not recorded stock-based employee compensation cost in net earnings. The
following table illustrates the effect on net earnings and earnings per share as
if the Company had applied the fair value recognition provisions of SFAS No.
123.
7
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- -------- -------
Net earnings, as reported $59,387 $35,069 $111,522 $73,604
Deduct:
Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 4,085 3,606 8,724 6,339
------- ------- -------- -------
Pro forma net earnings $55,302 $31,463 $102,798 $67,265
======= ======= ======== =======
Earnings per share:
Basic - as reported $ 0.58 $ 0.35 $ 1.08 $ 0.73
======= ======= ======== =======
Basic - pro forma $ 0.54 $ 0.31 $ 0.99 $ 0.67
======= ======= ======== =======
Diluted - as reported $ 0.56 $ 0.33 $ 1.05 $ 0.69
======= ======= ======== =======
Diluted - pro forma $ 0.53 $ 0.29 $ 0.97 $ 0.63
======= ======= ======== =======
4. OTHER RECEIVABLES
Included in other receivables at June 30, 2004 was a $47,517 receivable from
Bayer Corporation that was collected during the quarter ended September 30,
2004. The amount represented a price adjustment on the cost of certain
Ciprofloxacin inventory purchased from Bayer in the second half of fiscal 2004.
5. INVENTORIES, NET
Inventories consist of the following:
DECEMBER 31, JUNE 30,
2004 2004
------------ --------
Raw materials and supplies $ 88,649 $ 86,238
Work-in-process 15,035 17,449
Finished goods 47,452 46,565
-------- --------
Total $151,136 $150,252
======== ========
Inventories are presented net of reserves of $21,287 and $23,910 at
December 31, 2004 and June 30, 2004, respectively.
6. RELATED PARTIES
Dr. Bernard C. Sherman and Jacob M. Kay
8
During the three months ended December 31, 2004 and 2003, the Company purchased
$1,902 and $1,379, respectively, of bulk pharmaceutical material from companies
owned or controlled by Dr. Bernard C. Sherman, a member of the Company's Board
of Directors until October 24, 2002 and a significant shareholder. Jacob M. Kay,
a member of the Board of Directors, is president of Apotex, Inc., one of the
companies owned or controlled by Dr. Sherman. For the six months ended December
31, 2004 and 2003 such purchases were $5,575 and $2,805, respectively. In
addition, during the three months ended December 31, 2004 and 2003, the Company
sold $1,690 and $2,759, respectively, of its pharmaceutical products and bulk
pharmaceutical materials to companies owned or controlled by Dr. Sherman. For
the six months ended December 31, 2004 and 2003, such sales were $4,967 and
$4,862, respectively. As of December 31, 2004 and June 30, 2004, the Company's
accounts receivable included $902 and $1,203, respectively, due from such
companies.
During fiscal 1996, the Company entered into an agreement with a company
controlled by Dr. Sherman to share litigation and related costs in connection
with the Company's Fluoxetine patent challenge. For the three months ended
December 31, 2004 and 2003, the Company recorded $59 and $344, respectively,
under this agreement as a reduction to operating expenses. For the six months
ended December 31, 2004, the Company recorded $69 and $617, respectively, under
this agreement as a reduction of operating expenses. For the three months ended
December 31, 2004 and 2003, the Company recorded $0 and $144, respectively, as
cost of sales under this agreement. For the six months ended December 31, 2004
and 2003, the Company recorded $1,438 and $336, respectively, as cost of sales
related to this agreement.
In addition, the Company receives a royalty on a product marketed and sold by a
company controlled by Dr. Sherman. Royalty revenues amounted to $75 and $69 for
the quarter ended December 31, 2004 and December 31, 2003, respectively, and
$150 and $156 for the six months ended December 31, 2004 and December 31, 2003,
respectively.
As of December 31, 2004 and June 30, 2004, the Company's accrued liabilities
included $0 and $2,028, respectively, related to transactions with entities
owned or controlled by Dr. Sherman.
7. OTHER INTANGIBLE ASSETS
Intangible assets, excluding goodwill, which are comprised primarily of product
licenses and product rights and related intangibles, consist of the following:
DECEMBER 31, JUNE 30,
2004 2004
------------ --------
Product licenses $ 45,350 $45,350
Product rights and related intangibles 70,796 24,246
-------- -------
116,146 69,596
Less: accumulated amortization (10,639) (4,699)
-------- -------
Other intangible assets, net $105,507 $64,897
======== =======
9
In September 2004, the Company exercised its option and paid $19,250 to buy-out
the future royalty interests on certain extended cycle oral contraception
products, including SEASONALE, from the patent holder for SEASONALE. This
payment is included in product rights and related intangibles at December 31,
2004.
In November 2004, the Company acquired the exclusive rights in the United States
for Prefest(R) Tablets from King Pharmaceuticals, Inc. for $15,000, and in
December 2004, it acquired the exclusive rights in the United States for
Nordette(R) Tablets from King for $12,000. These acquisition costs are included
in product rights and intangibles at December 31, 2004.
Estimated amortization expense on product licenses and product rights and
related intangibles for the years ending June 30, 2005 through 2009 is as
follows:
2005 $12,814
2006 $12,630
2007 $12,134
2008 $11,685
2009 $11,270
The Company's product licenses, and product rights and related intangibles, have
weighted-average useful lives of approximately 10 and 11 years, respectively.
8. DEBT
In August 2004, the Company entered into a new $175,000 revolving credit
facility that replaced its prior $40,000 facility. This new facility has a
five-year term that expires on August 30, 2009. The Company may use the funds
available under the new credit facility for working capital, capital
expenditures, acquisitions and other general corporate purposes. As of December
31, 2004, there were no borrowings outstanding under this facility.
9. SEGMENT REPORTING
The Company operates in two reportable business segments: Generic
Pharmaceuticals and Proprietary Pharmaceuticals. Product sales and gross profit
information for the Company's operating segments consist of the following:
10
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
----------------------------------- -----------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
% of % of % of % of
$'s sales $'s sales $'s sales $'s sales
-------- ----- -------- ----- -------- ----- -------- -----
Product sales:
Generic $191,616 75% $337,497 91% $371,858 75% $615,879 91%
Proprietary 64,177 25% 32,365 9% 126,934 25% 62,743 9%
-------- --- -------- --- -------- --- -------- ---
Total product sales $255,793 100% $369,862 100% $498,792 100% $678,622 100%
======== === ======== === ======== === ======== ===
Margin Margin Margin Margin
$'s % $'s % $'s % $'s %
-------- ------ -------- ------ -------- ------ -------- ------
Gross profit:
Generic $123,452 64% $137,120 41% $242,207 65% $260,536 42%
Proprietary 54,282 85% 25,020 77% 108,888 86% 49,463 79%
-------- -- -------- -- -------- -- -------- --
Total gross profit $177,734 69% $162,140 44% $351,095 70% $309,999 46%
======== == ======== == ======== == ======== ==
10. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators used to
calculate earnings per share ("EPS") in the consolidated statements of
operations:
11
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003 2004 2003
-------- -------- -------- --------
Earnings per common share - basic:
Net earnings (numerator) $ 59,387 $ 35,069 $111,522 $ 73,604
-------- -------- -------- --------
Weighted average shares (denominator) 102,526 100,806 103,409 100,596
-------- -------- -------- --------
Earnings per common share-basic $ 0.58 $ 0.35 $ 1.08 $ 0.73
======== ======== ======== ========
Earnings per common share - diluted:
Net earnings (numerator) $ 59,387 $ 35,069 $111,522 $ 73,604
-------- -------- -------- --------
Weighted average shares 102,526 100,806 103,409 100,596
Effect of dilutive options and warrants 2,618 5,754 2,619 5,597
-------- -------- -------- --------
Weighted average shares - diluted (denominator) 105,144 106,560 106,028 106,193
-------- -------- -------- --------
Earnings per common share-diluted $ 0.56 $ 0.33 $ 1.05 $ 0.69
======== ======== ======== ========
2004 2003 2004 2003
-------- -------- -------- --------
Not included in the calculation of diluted earnings
per share because their impact is antidilutive:
Stock options outstanding 1,830 3 1,795 31
11. 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 earnings and the net changes
in unrealized gains and losses on securities classified for SFAS No. 115
purposes as "available for sale." Total comprehensive income for the three
months ended December 31, 2004 and 2003 was $58,935 and $35,225, respectively,
and for the six months ended December 31, 2004 and 2003 was $110,717 and
$73,783, respectively.
12. COMMITMENTS AND CONTINGENCIES
Leases
The Company is party to various leases that relate to the rental of office
facilities and equipment. The table below shows the future minimum rental
payments, exclusive of taxes, insurance and other costs, under noncancellable
long-term leases.
12
FOR FISCAL YEARS ENDING JUNE 30,
2005 2006 2007 2008 2009 THEREAFTER
------ ------ ------ ------ ------ ----------
Operating leases $4,061 $4,297 $3,977 $3,376 $3,280 $18,775
Capital leases 1,868 1,692 856 204 95 32
------ ------ ------ ------ ------ -------
Minimum lease payments $5,929 $5,989 $4,833 $3,580 $3,375 $18,807
====== ====== ====== ====== ====== =======
Product Liability Insurance
The Company utilizes a combination of self-insurance and traditional third-party
insurance policies to cover product liability claims. On September 30, 2004, the
Company terminated the "finite-risk" insurance arrangement that it had in place
for the previous two years, and in connection with such termination increased
its traditional third-party product liability coverage, as discussed below.
Self Insurance
The Company is self insured for up to $25,000 of costs incurred relating to
product liability claims arising during the current policy period that began on
October 1, 2004 and ends on September 30, 2005. In addition, to the extent the
third party liability insurance discussed below does not cover certain products,
the Company would be responsible for all costs arising from claims relating to
those excluded products.
Third Party Insurance
The Company maintains third-party insurance that provides coverage, subject to
specified co-insurance requirements, for the cost of product liability claims
arising during the current policy period between an aggregate amount of $25,000
and $75,000. In addition, the Company has obtained extended reporting periods
under previous policies for claims arising prior to the current policy period.
The current period and extended reporting period policies exclude certain
products.
Indemnity Provisions
From time-to-time, in the normal course of business, the Company agrees to
indemnify its employees, suppliers and customers concerning product liability
and other matters. The Company does not believe that the likelihood of paying
amounts related to these indemnity provisions is probable; as a result, no
amounts have been recorded in the financial statements with respect to these
obligations.
13
Litigation Matters
The Company is engaged in various legal proceedings incidental to its business.
Summarized below are the more significant matters. In accordance with SFAS No.
5, "Accounting for Contingencies," it is the Company's policy to accrue for
amounts related to these legal matters if it is probable that a liability has
been incurred and an amount is reasonably estimable. To date, the Company has
not established a reserve for the liability associated with these claims or
related defense costs.
Ciprofloxacin (Cipro(R)) Antitrust Class Actions
To date the Company has been named as a co-defendant 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 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.
Based on this belief, the Company is vigorously defending itself in these
matters. The Company anticipates that these matters may take several years to
resolve. An unfavorable outcome could have a material adverse effect on the
Company's consolidated financial statements.
Tamoxifen Antitrust Class Actions
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 L.P. and the Company alleging, among other things, that the 1993
settlement of patent litigation between Zeneca and the Company violated the
antitrust laws, insulated Zeneca and the Company from generic competition and
enabled Zeneca 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. On May 19, 2003, the
U.S. District Court dismissed the complaints for failure to state a viable
antitrust claim. The cases are now on 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. Based on this
belief, the Company is vigorously defending itself in these matters. The Company
anticipates that these matters may take several years to resolve. An unfavorable
outcome could have a material adverse effect 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
14
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 District Court granted summary
judgment in favor of the Company, finding that its generic 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. The amended complaint seeks
damages and enhanced damages based upon willful infringement. The Company filed
an answer to BTG's amended complaint in July 2003. The Company believes that it
has not infringed BTG's patent. The Company has sold approximately $110,000 of
Kariva from its launch to June 30, 2004 and continues to sell the product. If
BTG and Organon are successful, the Company could be liable for damages for
patent infringement that could exceed the Company's profit on the sale of Kariva
and may be prohibited from continuing to sell its Kariva product. An unfavorable
outcome could have a material adverse effect on the Company's consolidated
financial statements.
Hormone Therapy Litigation
The Company and/or its Duramed subsidiary have been named as a defendant in
approximately 2,500 personal injury product liability cases brought against the
Company and other manufacturers by plaintiffs claiming that they suffered
injuries resulting from the use of Cenestin or the use of medroxyprogesterone
acetate in conjunction with Premarin or other hormone therapy products. While
Barr and/or Duramed have been named as defendants in these cases, a much smaller
number of complaints actually allege the plaintiffs took a product manufactured
by Barr and/or Duramed. The majority of these cases are either pending in the
Philadelphia Court of Common Pleas or have been filed in other state courts,
removed to federal court and transferred to the United States District Court for
the Western District of Arkansas for consolidated pretrial proceedings.
The Company believes it has viable defenses to the allegations in the complaints
and is defending the actions vigorously. At this juncture, it is not possible to
accurately assess the exposure the litigation presents for the Company.
Invamed, Inc./Apothecon, Inc.
In February 1998, Invamed, Inc. and Apothecon, Inc., both of which have since
been acquired by Sandoz, 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
15
Southern District of New York, alleging violations of antitrust laws and also
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 appealed the District Court's decision to the
United States Court of Appeals for the Second Circuit. Trial on the merits was
stayed pending the outcome of the appeal.
On October 18, 2004, the Court of Appeals reversed the District Court's grant of
summary judgment and held that the plaintiffs have raised triable issues of
material fact on their antitrust claims.
The Company believes that the suits filed by Invamed and Apothecon are without
merit and is vigorously defending its position. The plaintiffs were seeking
damages of approximately $120,000 as of December 31, 2000, and if successful on
their underlying claims may seek to obtain treble damages. An unfavorable
outcome could have a material adverse effect on the Company's consolidated
financial statements.
Medicaid Reimbursement Cases
The Company has been named as a defendant in separate actions brought by the
Commonwealth of Massachusetts; Suffolk County, New York; Rockland County, New
York; Westchester County, New York; the City of New York, the State of Alabama,
the State of Illinois and the State of Kentucky against numerous pharmaceutical
manufacturers. The plaintiffs seek 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 is
vigorously defending itself. However, an unfavorable outcome could have a
material adverse effect on the Company's consolidated financial statements.
Other Litigation
As of December 31, 2004, the Company was involved with other lawsuits incidental
to its business, including patent infringement actions, product liability, and
personal injury claims. Management of the Company, based on 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis addresses material changes in the results
of operations and financial condition of Barr Pharmaceuticals, Inc. and
subsidiaries for the periods presented. This discussion and analysis should be
read in conjunction with the consolidated financial statements, the related
notes to consolidated financial statements and Management's Discussion and
Analysis of Results of Operations and Financial Condition included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2004,
and the unaudited interim consolidated financial statements and related notes
included in Item 1 of this report on Form 10-Q.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2004 AND DECEMBER 31,
2003
REVENUES
The following table sets forth revenue data for the three and six months ended
December 31, 2004 and 2003 (dollars in millions).
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
-------------------------------- --------------------------------
CHANGE CHANGE
-------------- --------------
2004 2003 $ % 2004 2003 $ %
------ ------ ------- ---- ------ ------ ------- ----
Generic products:
Distributed alternative brands(1) $ -- $145.4 $(145.4) -100% $ -- $260.2 $(260.2) -100%
Oral contraceptives 102.2 98.5 3.7 4% 202.2 186.8 15.4 8%
Other generic(2) 89.4 93.6 (4.2) -4% 169.7 168.9 0.8 0%
------ ------ ------- ------ ------ -------
Total generic products 191.6 337.5 (145.9) -43% 371.9 615.9 (244.0) -40%
Proprietary products 64.2 32.4 31.8 98% 126.9 62.7 64.2 102%
------ ------ ------- ------ ------ -------
Total Product Sales 255.8 369.9 (114.1) -31% 498.8 678.6 (179.8) -26%
------ ------ ------- ---- ------ ------ ------- ----
Development and other revenue 1.6 4.2 (2.6) -62% 3.1 6.2 (3.1) -50%
------ ------ ------- ------ ------ -------
Total revenues $257.4 $374.1 $(116.7) -31% $501.9 $684.8 $(182.9) -27%
====== ====== ======= ====== ====== =======
-------------
(1) Reflects sales of Ciprofloxacin during exclusivity
(2) Includes sales of Ciprofloxacin subsequent to exclusivity expiry
TOTAL PRODUCT SALES
Total product sales for the three and six months ended December 31, 2004
decreased as compared to the prior year periods primarily due to the expected
decline in sales of our distributed version of Ciprofloxacin, as discussed in
detail below. Partially offsetting the decrease in Ciprofloxacin sales were
significant increases in sales of our proprietary products.
17
Generic Products
Distributed Alternative Brands (Ciprofloxacin)
On June 9, 2003 we began distributing Ciprofloxacin hydrochloride tablets and
oral suspension pursuant to a license from Bayer Corporation obtained under a
1997 settlement of a patent challenge we initiated regarding Bayer's Cipro(R)
antibiotic. In September 2003, we entered into an amended supply agreement with
Bayer that enabled us to distribute Ciprofloxacin during and after Bayer's
period of pediatric exclusivity, which ended on June 9, 2004. As a result of the
exclusivity we enjoyed, Ciprofloxacin was our largest selling product in fiscal
year 2004. We have shared and continue to share one-half of our profits, as
defined, from the sale of Ciprofloxacin with Aventis, the contractual successor
to our partner in the Cipro patent challenge case. Upon expiration of Bayer's
period of pediatric exclusivity on June 9, 2004, as expected, several other
competing Ciprofloxacin products were launched. As a result of the flood of
competing products, our market share and product pricing declined dramatically
for Ciprofloxacin almost immediately. Since the expiration of the exclusivity
period, sales of Ciprofloxacin are now included in the "Other generic" line item
in the table above, and were $0.8 million for the three months ended December
31, 2004, and $1.6 million for the six-month period then ended.
Oral Contraceptives
For the quarter ended December 31, 2004, the 4% growth in sales of generic oral
contraceptives over the prior year period primarily resulted from contributions
in the current quarter from two new products, Velivet and Aranel, which more
than offset a slight decline in existing product sales.
For the six-month period ended December 31, 2004, the 8% growth in sales of
generic oral contraceptives sales over the prior year period reflects both the
contributions from the two new products discussed above and a slight increase in
existing product sales.
Other Generic Products
For the quarter ended December 31, 2004, other generic product sales declined 4%
from the prior year period, as sales from new products, including Didanosine and
Metformin XR 750mg, both launched in the current quarter, were more than offset
by a decline in existing product sales. The decline in existing product sales
was primarily due to a significant decline in sales of our Dextroamphetamine
group of products due to price and volume declines resulting from the entry of
additional generic competitors.
For the six-month period ended December 31, 2004, other generic sales were
consistent with the prior year period. The current period included sales from
four new products, including Didanosine and Metformin XR 750mg, although their
contributions were somewhat offset by a decline in existing product sales,
primarily reflecting the lower sales of our Dextroamphetamine group of products,
as discussed above.
18
Proprietary Products
Proprietary product sales increased significantly for the three- and six-month
periods ended December 31, 2004, reflecting higher sales of existing products
and the contribution of new products launched since December 2003. SEASONALE
was the primary driver for higher sales of existing products as SEASONALE sales
totaled $20.6 million for the three months ended December 31, 2004 and $36.9
million for the six months then ended. In addition, new products made
significant contributions to our proprietary sales, namely Loestrin/Loestrin Fe,
Plan B, and Prefest(R), which were acquired in February, March and November
2004, respectively.
COST OF SALES
Cost of sales includes the cost for products we purchase from third parties, our
manufacturing and packaging costs for products we manufacture, our profit
sharing or royalty payments made to third parties, including raw material
suppliers, and any changes to our inventory reserves. Amortization costs arising
from the acquisition of product rights are included in selling, general and
administrative costs.
Product mix plays a significant role in our quarterly and annual overall gross
margin percentage. In the past, our overall margins have been negatively
impacted by sales of lower margin distributed versions of products such as
Ciprofloxacin and Tamoxifen, which were manufactured for us by brand companies
and distributed by us under the terms of the respective patent challenge
settlement agreements.
The following table sets forth cost of sales data, in dollars, as well as the
resulting gross margins expressed as a percentage of product sales, for the
three and six months ended December 31, 2004 and 2003 (dollars in millions):
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
-------------------------------- ---------------------------------
CHANGE CHANGE
--------------- ---------------
2004 2003 $ % 2004 2003 $ %
----- ------ ------- ----- ------ ------ ------- -----
Generic products(1) $68.2 $200.4 $(132.2) -66.0% $129.7 $355.3 $(225.6) -63.5%
===== ====== ======= ====== ====== =======
Gross margin 64.4% 40.6% 65.1% 42.3%
Proprietary products $ 9.9 $ 7.3 $ 2.6 35.6% $ 18.0 $ 13.3 $ 4.7 35.3%
===== ====== ======= ====== ====== =======
Gross margin 84.6% 77.3% 85.8% 78.8%
Total cost of sales $78.1 $207.7 $(129.6) -62.4% $147.7 $368.6 $(220.9) -59.9%
===== ====== ======= ====== ====== =======
Gross margin 69.5% 43.8% 70.4% 45.7%
---------------------
(1) Results for the three and six months ended December 31, 2003 included the
cost of purchasing Ciprofloxacin from Bayer, which we distributed as an
alternative brand through June 9, 2004, and thereafter sold as a
manufactured product.
19
The decrease in total cost of sales for the three and six months ended December
31, 2004, on a dollar basis, was primarily due to the year-over-year decrease in
sales of Ciprofloxacin, which in prior year periods we had purchased from Bayer.
Margins on our generic products increased significantly in both the three and
six-month periods ended December 31, 2004 due mainly to the decrease in
year-over-year distributed Ciprofloxacin sales. As a distributed product for
which we shared the profits with our partner in the Cipro patent challenge,
Ciprofloxacin had a higher cost of sales and a lower margin than our other
generic products.
Margins on our proprietary products increased in the three and six month periods
ended December 31, 2004 due to an improved mix among our proprietary products,
resulting from increasing sales of certain higher-margin proprietary products,
principally SEASONALE.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
The following table sets forth selling, general and administrative expense for
the three and six months ended December 31, 2004 and 2003 (dollars in millions):
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------- -------------------------------
CHANGE CHANGE
---------- -------------
2004 2003 $ % 2004 2003 $ %
----- ----- ---- --- ------ ------ ------ ----
Selling, general and administrative $58.4 $54.0 $4.4 8% $122.7 $119.5 $ 3.2 3%
===== ===== ==== === ====== ====== ====== ====
Charges included in selling, general
and admin. $ -- $ -- $ -- NA $ -- $ 15.7 $(15.7) -100%
===== ===== ==== === ====== ====== ====== ====
Selling, general and administrative expenses for the current quarter were
slightly higher than the prior year period primarily due to a $2.2 million
increase in amortization costs related to certain intangible assets.
For the six-month periods, the 3% increase in selling, general and
administrative expenses reflects higher selling and marketing costs primarily
due to a $10.8 million increase in marketing costs related to SEASONALE,
reflecting the expansion of our direct-to-consumer advertising campaign, and for
Plan B, which we acquired in the third quarter of fiscal 2004. Also, information
for technology (IT) costs increased $3.6 million, reflecting the support of
ongoing IT projects, while amortization costs increased $3.3 million, due to
factors discussed in the paragraph above. The prior six-month period included a
$15.7 million valuation allowance we established in September 2003 for loans we
made to a former raw material supplier. There was no comparable valuation
allowance in the current six-month period.
20
RESEARCH AND DEVELOPMENT
The following table sets forth research and development expenses for the three
and six months ended December 31, 2004 and 2003 (dollars in millions):
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------- -------------------------------
CHANGE CHANGE
--------------- ---------------
2004 2003 $ % 2004 2003 $ %
----- ----- ------ ------ ----- ----- ------ ------
Research and development $31.1 $63.1 $(32.0) -50.7% $59.7 $86.6 $(26.9) -31.1%
===== ===== ====== ====== ===== ===== ====== ======
Charges included in R&D $ -- $35.6 $(35.6) -100.0% $ -- $35.6 $(35.6) -100.0%
===== ===== ====== ====== ===== ===== ====== ======
The decrease in research and development expense for the quarter and for the
six-month period is attributable to the prior year including $35.6 million of
in-process research and development costs that were written-off in connection
with our purchase of substantially all the assets of Endeavor Pharmaceuticals,
Inc. in November 2003. For all other R&D expenditures there was an overall
increase in the three- and six-month periods ended December 31, 2004 in
comparison to the same periods in the prior year. The increase for the three-
month period was primarily driven by a $4.0 million increase in the costs of
bioequivalence studies, reflecting both an increase in the number and costs of
the studies. The increase for the six-month period resulted primarily from a
$3.4 million increase in costs paid to third parties in connection with the
development of new products using new drug delivery systems for us (such as
patches, sterile ophthalmics and nasal sprays) and a $3.4 million increase in
costs associated with a greater number of bioequivalence studies, as discussed
above.
INCOME TAXES
The following table sets forth income tax expense and the resulting effective
tax rate stated as a percentage of pre-tax income for the three and six months
ended December 31, 2004 and 2003 (dollars in millions):
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------- -----------------------------
CHANGE CHANGE
-------------- ------------
2004 2003 $ % 2004 2003 $ %
----- ----- ----- ------ ----- ----- ----- ----
Income tax expense $32.4 $14.1 $18.3 129.8% $63.5 $36.7 $26.8 73.0%
===== ===== ===== ===== ===== ===== ===== ====
Effective tax rate 35.3% 28.7% 36.3% 33.3%
Our effective tax rate for the quarter ended December 31, 2004 benefited from
the retroactive reinstatement, on October 4, 2004, of the federal research tax
credit that expired on June 30, 2004. The income tax provision for both the
three and six months ended December 31, 2003 was favorably impacted by a tax
benefit totaling approximately $4.0 million related to: (1) the completion of
several tax audits, and (2) the
21
Internal Revenue Service's approval of a change in our method of computing
certain tax credits. The effective tax rate for the full year is expected to be
consistent with the rate for the first half of fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of cash is the collection of accounts and other receivables
primarily related to product sales. Our primary uses of cash include financing
inventory, research and development, marketing, capital projects, our share
repurchase program, and business development activities.
Within the past year cash flows from operations have been more than sufficient
to fund our cash needs. At December 31, 2004, our cash and cash equivalents
totaled $456.0 million, an increase of $36.2 million from our cash and cash
equivalents at June 30, 2004.
Operating Activities
Our operating cash flows increased to $214.7 million in the first half of fiscal
2005 from $143.5 million in the six months ended December 31, 2003. Components
of the $214.7 million of operating cash flows in the first half of this fiscal
year include net earnings of $111.5 million and a $48.8 million decrease in
other receivables primarily due to a $47.5 million payment from Bayer related to
a price adjustment for Ciprofloxacin inventory we purchased during the second
half of fiscal 2004 and a nearly $40.0 million increase in income taxes payable
reflecting the timing of federal estimated income tax payments. The payment from
Bayer will not be repeated in the second half of the year.
Investing Activities
Net cash used in investing activities increased to $79.0 million during the
first half of fiscal 2005 from $65.5 million in the prior year period.
Significant investing activities in the first half of fiscal 2005 included the
purchase of product rights for Prefest(R) and Nordette(R) totaling $27.0 million
and a $19.3 million payment for the buy-out of future royalty interests from the
patent holder for SEASONALE. Capital expenditures for IT projects and plant
upgrades and expansions were $24.9 million in the first half of this year, up
from $20.8 million in the prior year period.
Financing Activities
Net cash used in financing activities totaled $99.6 million for the first half
of fiscal 2005 compared to $7.7 million of net cash provided by financing
activities in the prior year period. This $107.3 million increase in cash used
in financing activities was due primarily to the repurchase of approximately
2.55 million shares of common stock for approximately $100.0 million in the
first half of fiscal 2005. Under our share repurchase program, we are authorized
to repurchase up to $300 million of common stock in the open market or in
privately negotiated transactions through December 31, 2005. Proceeds from the
exercise of stock options and employee stock purchase plans totaled $7.4 million
in the first six months of fiscal 2005, down from $14.6 million in the prior
year period.
22
Debt Repayments and Credit Availability
On August 30, 2004, the Company entered into a new $175.0 million, five-year
credit facility. To date, no draws have been made under the credit facility. If
and when drawn, borrowings will bear interest at a floating rate based on a base
rate or a Eurodollar rate. We may use the proceeds of the credit facility for
working capital, capital expenditures, and general corporate purposes (including
share repurchases and permitted acquisitions). Upon entering into the new credit
facility, the Company terminated its prior $40.0 million credit facility.
Sufficiency of Cash Resources
We believe that our current cash and cash equivalents, marketable securities,
investment balances, cash flows from operations and un-drawn amounts under our
revolving credit facility are adequate to fund our operations and planned
capital expenditures and to capitalize on certain strategic opportunities as
they arise. However, we have and will continue to evaluate our capital structure
as part of our goal to promote long-term shareholder value. To the extent that
additional capital resources are required, we believe that such capital may be
raised by additional bank borrowings, bond offerings or other means.
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/or require us to make our
most difficult and subjective judgments. Based on this definition, our most
critical policies are the following: (1) revenue recognition and related
provisions for estimated reductions to gross revenues (2) inventories and
related inventory reserves; (3) deferred taxes; (4) contingencies; and (5) the
assessment of recoverability of goodwill and other intangible assets. 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.
We review the factors that influence our estimates and, if necessary, adjust
them. Actual results may differ significantly from our estimates.
Set forth below is an updated discussion regarding the first critical accounting
policy listed above -- revenue recognition and related provisions for estimated
reductions to gross revenues. Because we have not updated the disclosure
relating to the other four critical accounting policies referred to above from
that contained in our most recent annual report, we will not reproduce them
below but rather refer you to our Annual Report on Form 10-K for the fiscal year
ended June 30, 2004 and the discussion regarding those four policies contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Critical Accounting Policies."
23
REVENUE RECOGNITION AND PROVISIONS FOR ESTIMATED REDUCTIONS TO GROSS REVENUES
We recognize revenue from product sales when title and risk of loss have
transferred to our customers and when collectibility is reasonably assured. This
is generally at the time products are received by the customer. If we believe we
have not met the requirements for recognizing revenue, we defer the recognition
until the requirements are met. From time to time the Company provides
incentives, such as trade show allowances or stocking allowances, that provide
incremental allowances to customers who in turn use such incremental allowances
to accelerate distribution to the end customer. We believe that such incentives
are normal and customary in the industry. Additionally, we understand that
certain of our wholesale customers speculate about the timing of price increases
and have made and may continue to make business decisions to buy additional
product in anticipation of future price increases. This practice has been
customary in the industry and would be part of a customer's "ordinary course of
business inventory level."
Upon recognizing revenue from a sale, we simultaneously record estimates for the
following items that reduce gross revenues:
- returns and allowances (including shelf-stock adjustments)
- chargebacks
- rebates
- Medicaid rebates
- prompt payment discounts and other allowances
For each of the items listed above other than Medicaid rebates, the estimated
amounts serve to reduce our accounts receivable balance. We include our estimate
for Medicaid rebates in accrued liabilities. A table showing the amounts of such
accruals at December 31, 2004 and June 30, 2004 is set forth below (dollars in
millions):
DECEMBER 31, JUNE 30,
2004 2004
------------ --------
Accounts receivable reserves:
Returns and allowances $ 60.7 $ 57.5
Chargebacks 38.7 38.9
Rebates 47.3 39.3
Other 6.0 6.2
------ ------
Total $152.7 $141.9
====== ======
Accrued liabilities:
Medicaid rebates $ 9.0 $ 11.4
====== ======
Estimates for rebates, Medicaid rebates and prompt payment discounts require a
lower degree of subjectivity and are less complex in nature. Returns and
allowances (including
24
shelf stock adjustments) and chargebacks require more subjective judgments.
These more subjective provisions are discussed in further detail below.
Returns and allowances - Our provision for returns and allowances consists of
our estimates of future product returns, pricing adjustments, delivery errors,
and our estimate of price adjustments arising from shelf stock adjustments
(which are discussed in greater detail below). Consistent with industry
practice, we maintain a return policy that allows our customers to return
product within a specified period of time both prior and subsequent to the
product's expiration date. The primary factors we consider in estimating our
potential product returns include:
- the shelf life or expiration date of each product;
- historical levels of expired product returns; and,
- the estimated date of return.
Shelf stock adjustments are credits issued to our customers to reflect decreases
in the selling prices of our products. These credits are customary in the
industry and are intended to reduce a customer's inventory cost to better
reflect current market prices. The determination to grant a shelf-stock credit
to a customer following a price decrease is at our discretion rather than
contractually required. The primary factors we consider when deciding whether to
record a reserve for a shelf-stock adjustment include:
- the estimated launch date of a competing product, which we determine
based on market intelligence;
- the estimated decline in the market price of our product, which we
determine based on historical experience and input from customers; and
- the estimated levels of inventory held by our customers at the time of
the anticipated decrease in market price, which we determine based
upon historical experience and customer input.
Chargebacks - We market and sell products directly to wholesalers, distributors,
warehousing pharmacy chains, mail order pharmacies and other direct purchasing
groups. We also market products indirectly to independent pharmacies,
non-warehousing chains, managed care organizations, and group purchasing
organizations, collectively referred to as "indirect customers." We enter into
agreements with some indirect customers to establish contract pricing for
certain products. These indirect customers then independently select a
wholesaler from which to purchase the products at these contracted prices.
Alternatively, we may pre-authorize wholesalers to offer specified contract
pricing to other indirect customers. Under either arrangement, we provide credit
to the wholesaler for any difference between the contracted price with the
indirect party and the wholesaler's invoice price. Such credit is called a
chargeback. The primary factors we consider in developing and evaluating our
provision for chargebacks include:
25
- the average historical chargeback credits; and
- an estimate of the weeks of inventory held by our wholesalers, based
on internal analysis of a wholesaler's historical purchases and
contract sales.
In September 2004, we revised our estimate of our chargeback reserve which
resulted in an increase in our reserve and lower reported sales by approximately
$6.0 million, or approximately 2.5%, for the quarter ended September 30, 2004.
FORWARD-LOOKING STATEMENTS
The preceding 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 outcome of litigation arising from challenging the validity or
non-infringement of patents covering our products;
- 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;
- our ability to complete product development activities in the
timeframes and for the costs we expect;
- market and customer acceptance and demand for our products;
- our dependence on revenues from significant customers or from
significant products;
- reimbursement policies of third party payors,
- the use of estimates in the preparation of our financial statements;
- the impact of competitive products and their pricing on our products,
including the launch of authorized generics;
- 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;
- 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;
26
- 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.
We wish to caution each reader of this report to consider carefully these
factors as well as special factors that may be discussed with each
forward-looking statement in this report or in our filings with the SEC, as such
factors, in some cases, could affect our ability to implement our business
strategies and may cause actual results to differ materially from those
contemplated by the statements expressed herein. Readers are urged to carefully
review and consider these factors. We undertake no duty to update the
forward-looking statements even though our situation may change in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for a change in interest rates relates
primarily to our investment portfolio of $575.6 million and variable rate debt
instruments of $12.4 million. The Company does not use derivative financial
instruments.
The Company's investment portfolio consists of cash and cash equivalents and
market auction debt securities classified as "available for sale." The Company's
primary investment objective is to preserve principal while at the same time
maximizing yields without significantly increasing risk. To achieve this
objective, the Company maintains its 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 80% of the portfolio matures in less than three months. The
carrying value of the investment portfolio approximates the market value at
December 31, 2004 and the value at maturity. Because its investments consist
mainly 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 the Company's consolidated financial statements.
Approximately $12.4 million, or 36% of the Company's outstanding debt at
December 31, 2004, is subject to variable interest rates based on the prime rate
or LIBOR. A hypothetical 100 basis point increase in interest rates on this
variable rate debt would reduce the Company's annual net income by approximately
$0.1 million. 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 amount of variable rate debt then existing. In addition,
any borrowings under our $175.0 million unsecured revolving
27
credit facility will bear interest at a variable rate based on the prime rate,
the Federal Funds rate or LIBOR. At December 31, 2004, no amounts were drawn
under this facility. At its current borrowing levels, the Company does not
believe that any market risk inherent in its debt instruments is likely to have
a material effect on its consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains 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 the Company's Chairman and Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures. 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 December 31, 2004, the Company carried out
an evaluation, under the supervision and with the participation of its
management, including the Chairman and Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chairman and Chief Executive Officer and Chief Financial Officer concluded that
the disclosure controls and procedures were effective in alerting them in a
timely manner to information relating to the Company required to be disclosed in
this report.
CHANGES IN INTERNAL CONTROLS
During the quarter ended December 31, 2004, there have been no changes to our
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation Matters
The disclosure under Note 12-Commitments and Contingencies-Litigation Matters
included in Part 1 of this report is incorporated in this Part II, Item 1 by
reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information about purchases the Company made of its
common stock during the three months ended December 31, 2004:
(in thousands, except per share)
Total number of
shares purchased Approx.$ value of
as part of publicly shares that may yet
Total number of Average price paid announced be purchased under
Period shares purchased per share program the program
------------------- ---------------- ------------------ -------------------- -------------------
October 1-31, 2004 969.6 $38.04 969.6 $200,018
November 1-30, 2004 - - - 200,018
December 1-31, 2004 - - - 200,018
----- ------ ----- --------
Total 969.6 38.04 969.6 $200,018
===== ====== ===== ========
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of Barr Pharmaceuticals, Inc. was held on
October 28, 2004. Of the 104,262,087 shares entitled to vote, 85,298,067 shares
were represented at the meeting or by proxy or present in person. The meeting
was held for the following purpose:
29
1. To elect nine directors. All nine nominees were elected based on the
following votes cast:
For Shares
----------------- ----------
Carole Ben-Maimon 83,421,675
Paul M. Bisaro 83,431,344
Harold Chefitz 82,405,992
Bruce L. Downey 83,562,204
Richard Frankovic 84,651,404
James Gilmore 85,142,492
Jacob M. Kay 85,121,455
Peter Seaver 85,154,658
George P. Stephan 82,943,317
2. To ratify the Audit Committee's selection of Deloitte & Touche LLP, as
independent auditors for the fiscal year ending June 30, 2005:
For Against Abstain
---------- --------- -------
84,012,389 1,238,449 47,229
ITEM 6. EXHIBITS
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
----------- -----------
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 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARR PHARMACEUTICALS, INC.
Dated: February 9, 2005 /s/ William T. McKee
----------------------------------------
William T. McKee
Vice President, Chief Financial Officer,
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
31