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 March 31, 2005
[ ] 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 Rule 12b-2 of the Exchange Act). X No
----- -----
Number of shares of common stock outstanding as of April 29, 2005: 103,258,448
1
BARR PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited) as of March 31,
2005 and June 30, 2004..................................... 3
Consolidated Statements of Operations (unaudited) for the
three months and nine months ended March 31,
2005 and 2004.............................................. 4
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended March 31, 2005 and 2004.................. 5
Notes to Consolidated Financial Statements (unaudited)........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 30
Item 4. Controls and Procedures....................................... 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................. 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds... 31
Item 6. Exhibits...................................................... 31
Signatures.................................................... 33
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BARR PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, JUNE 30,
2005 2004
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 14,721 $ 28,508
Marketable securities 512,434 423,746
Accounts receivable, net of reserves of $145,663 and $141,873, at
March 31, 2005 and June 30, 2004, respectively 166,479 153,890
Other receivables 14,114 60,848
Inventories, net 144,495 150,252
Deferred income taxes 47,467 46,077
Prepaid expenses and other current assets 13,037 14,925
---------- ----------
Total current assets 912,747 878,246
Property, plant and equipment, net of accumulated depreciation of $125,561
and $106,647, at March 31, 2005 and June 30, 2004, respectively 245,723 236,831
Deferred income taxes 51,005 35,016
Marketable securities 67,961 89,143
Other intangible assets 102,048 64,897
Goodwill 17,998 18,211
Other assets 9,705 10,925
---------- ----------
Total assets $1,407,187 $1,333,269
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,199 $ 61,089
Accrued liabilities 102,494 117,970
Current portion of long-term debt and capital lease obligations 5,439 8,447
Income taxes payable 38,556 20,139
---------- ----------
Total current liabilities 194,688 207,645
Long-term debt and captial lease obligations 15,855 32,355
Other liabilities 19,067 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 105,788,681 and 104,916,103, at March 31, 2005
and June 30, 2004, respectively 1,058 1,049
Additional paid-in capital 440,852 377,024
Retained earnings 837,548 664,681
Accumulated other comprehensive loss (1,191) --
---------- ----------
1,278,267 1,042,754
---------- ----------
Treasury stock at cost: 2,972,997 and 420,597 shares, at
March 31, 2005 and June 30, 2004, respectively (100,690) (708)
---------- ----------
Total shareholders' equity 1,177,577 1,042,046
---------- ----------
Total liabilities and shareholders' equity $1,407,187 $1,333,269
========== ==========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
BARR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- ---------------------
2005 2004 2005 2004
-------- -------- -------- ----------
Revenues:
Product sales $261,258 $316,707 $760,050 $ 995,329
Development and other revenue 3,749 4,378 6,834 10,591
-------- -------- -------- ----------
Total revenues 265,007 321,085 766,884 1,005,920
Costs and expenses:
Cost of sales 77,653 145,288 225,350 513,911
Selling, general and administrative 59,124 56,538 181,839 176,040
Research and development 35,488 58,219 95,139 144,778
-------- -------- -------- ----------
Earnings from operations 92,742 61,040 264,556 171,191
Interest income 2,825 1,551 7,219 4,192
Interest expense 287 532 1,351 2,032
Other (expense) (260) (631) (409) (1,578)
-------- -------- -------- ----------
Earnings before income taxes 95,020 61,428 270,015 171,773
Income tax expense 33,675 26,289 97,148 63,030
-------- -------- -------- ----------
Net earnings $ 61,345 $ 35,139 $172,867 $ 108,743
======== ======== ======== ==========
Earnings per common share - basic $ 0.60 $ 0.35 $ 1.68 $ 1.08
======== ======== ======== ==========
Earnings per common share - diluted $ 0.58 $ 0.33 $ 1.63 $ 1.02
======== ======== ======== ==========
Weighted average shares 102,717 101,797 103,180 100,978
======== ======== ======== ==========
Weighted average shares - diluted 105,892 106,920 105,962 106,421
======== ======== ======== ==========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
BARR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2005 AND 2004
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 172,867 $ 108,743
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 32,761 22,842
Provision for losses on loans to Natural Biologics 1,050 15,729
Loss on disposal of property, plant & equipment 436 7,350
Other (1,813) 1,025
Tax benefit of stock incentive plans and warrant
exercise 33,516 24,559
Write-off of acquired in-process research and development -- 72,433
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net 34,145 76,831
Inventories 5,757 (60,850)
Prepaid expenses and other current assets 3,642 (28,069)
Other assets 6,560 (722)
Increase (decrease) in:
Accounts payable, accrued liabilities and other
liabilities (50,429) (32,513)
Income taxes payable 18,417 (11,316)
--------- ---------
Net cash provided by operating activities 256,909 196,042
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (42,863) (36,905)
Acquisitions, net of cash acquired (46,500) (90,563)
Investment in venture funds (5,940) (3,480)
Purchases of marketable securities (871,227) (877,100)
Sales of maketable securities 803,480 804,190
Other (1,050) (1,321)
--------- ---------
Net cash used in investing activities (164,100) (205,179)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital
leases (19,712) (7,739)
Purchase of treasury stock (99,982) --
Principal payment on note assumed in acquisition -- (6,500)
Proceeds from exercise of stock options and employee
stock purchases 13,098 21,926
Other -- (290)
--------- ---------
Net cash (used in) provided by financing activities (106,596) 7,397
--------- ---------
Decrease in cash and cash equivalents (13,787) (1,740)
Cash and cash equivalents at beginning of period 28,508 27,242
--------- ---------
Cash and cash equivalents at end of period $ 14,721 $ 25,502
========= =========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period:
Interest, net of portion capitalized $ 1,169 $ 1,807
========= =========
Income taxes $ 45,382 $ 71,267
========= =========
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 its 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 revises SFAS No. 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") and amends SFAS No. 95
"Statement of Cashflows." SFAS No. 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 and directors. Pro forma
disclosure is no longer an alternative. The Company will adopt SFAS No. 123(R)
on July 1, 2005. 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. As permitted by SFAS No. 123, the
Company currently accounts for share-based payments to employees and directors
using the intrinsic value method and, as such, recognizes no compensation cost
for equity-based awards. Accordingly, the adoption of SFAS No. 123(R)'s fair
value method will have an impact on the Company's results of operations,
although it will have no net impact on the Company's overall financial position.
Currently, the Company uses the Black-Scholes formula to estimate the value of
stock-based compensation granted to employees and directors and may continue to
use this acceptable option valuation model upon the adoption of SFAS No. 123(R)
on July 1, 2005. Because SFAS No. 123(R) must be applied not only to new awards,
but to previously granted awards that are not fully vested on the effective
date, compensation cost for some previously granted options will be recognized
under SFAS No. 123(R). However, had the Company adopted SFAS No. 123(R) in prior
periods, the impact of that Statement would have approximated the impact
described in the disclosure of pro forma net income and earnings per share
disclosed in Note 4 below.
6
SFAS No. 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as currently required.
The Company is currently considering the following transition methods for
adoption of SFAS No. 123(R):
- The modified prospective method, which requires companies (1) to
record compensation expense for the non-vested portion of previously
issued awards that remain outstanding at the initial date of adoption
and (2) to record compensation expense for any awards issued or
modified after July 1, 2005.
- The modified retrospective method, which allows companies to
recognize, in their prior period financial statements, the exact
amounts of compensation expense previously disclosed in the footnote
to the financial statements showing the pro forma effects of
stock-based compensation (such as in Note 4 below).
The Company plans to determine its method of transition during the quarter
ending June 30, 2005.
In November 2004, the FASB issued Statement No. 151, "Inventory Costs, an
amendment of ARB 43, Chapter 4" ("SFAS No. 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 SFAS No. 151 requires that these costs be
recognized in income as incurred. This Statement is effective for the Company's
fiscal year beginning July 1, 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" (the
"Act"), 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 No. 109 and not as a tax rate reduction. The Company is awaiting additional
guidance from the IRS before completing its assessment of the impact of adopting
FSP FAS 109-1 on its consolidated financial statements. The Act will be
effective for the Company's fiscal year beginning July 1, 2005.
3. MARKETABLE SECURITIES, SHORT-TERM
In the quarter ended March 31, 2005, the Company concluded that it was
appropriate to reclassify auction rate securities as short-term marketable
securities. Previously, such investments had been classified on the balance
sheet as cash and cash equivalents. Accordingly, the Company has revised its
June 30, 2004 consolidated balance sheet to
7
reclassify auction rate securities as short-term marketable securities.
Previously, such investments had been classified on the balance sheet as cash
and cash equivalents. Accordingly, the Company has revised its June 30, 2004
consolidated balance sheet to reclassify auction rate securities in the amount
of $391,370 from cash and cash equivalents to short-term marketable securities.
The Company classifies these securities as "available-for-sale", as defined in
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities."
The Company has also revised the presentation of the consolidated statements of
cash flows for the periods ended March 31, 2005 and 2004 to reflect the gross
purchases and sales of these securities as investing activities rather than as
components of cash and cash equivalents. This change in classification does not
affect previously reported cash flows from operating activities or financing
activities in the Company's consolidated statements of cash flows nor does it
have an affect on the Company's previously reported consolidated statements of
operations.
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 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.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -------------------
2005 2004 2005 2004
------- ------- -------- --------
Net earnings, as reported $61,345 $35,139 $172,867 $108,743
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects 4,017 3,135 14,967 9,485
------- ------- -------- --------
Pro forma net earnings $57,328 $32,004 $157,900 $ 99,258
======= ======= ======== ========
Earnings per share:
Basic - as reported $ 0.60 $ 0.35 $ 1.68 $ 1.08
======= ======= ======== ========
Basic - pro forma $ 0.56 $ 0.31 $ 1.53 $ 0.98
======= ======= ======== ========
Diluted - as reported $ 0.58 $ 0.33 $ 1.63 $ 1.02
======= ======= ======== ========
Diluted - pro forma $ 0.54 $ 0.30 $ 1.49 $ 0.93
======= ======= ======== ========
5. OTHER RECEIVABLES
Included in other receivables at June 30, 2004 was a $47,517 receivable from
Bayer Corporation ("Bayer") 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.
8
6. INVENTORIES, NET
Inventories consist of the following:
MARCH 31, JUNE 30,
2005 2004
--------- --------
Raw materials and supplies $ 86,255 $ 86,238
Work-in-process 15,579 17,449
Finished goods 42,661 46,565
-------- --------
Total $144,495 $150,252
======== ========
Inventories are presented net of reserves of $20,879 and $23,910 at March 31,
2005 and June 30, 2004, respectively.
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:
MARCH 31, JUNE 30,
2005 2004
--------- --------
Product licenses $ 45,600 $45,350
Product rights and related intangibles 70,796 24,246
-------- -------
116,396 69,596
Less: accumulated amortization (14,348) (4,699)
-------- -------
Other intangible assets, net $102,048 $64,897
======== =======
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 March 31, 2005.
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 March 31, 2005.
Estimated amortization expense on product licenses and product rights and
related intangibles for the years ending June 30, 2005 through 2009 is as
follows:
9
2005 $12,839
2006 $12,705
2007 $12,209
2008 $11,760
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 March 31,
2005, there were no borrowings outstanding under this facility.
In February 2005, the Company made a $12,200 payment in complete satisfaction of
mortgage notes held by a bank. The notes were secured by the Company's
Cincinnati, Ohio manufacturing 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:
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------------ -----------------------------------
2005 2004 2005 2004
---------------- ----------------- ---------------- ----------------
% OF % OF % OF % OF
$ SALES $ SALES $ SALES $ SALES
-------- ----- --------- ----- -------- ----- -------- -----
Product sales
Proprietary $ 71,840 27% $ 39,257 12% $198,774 26% $102,000 10%
Generic 189,418 73% 277,450 88% 561,276 74% 893,329 90%
-------- -------- -------- --------
Total product sales $261,258 100% $316,707 100% $760,050 100% $995,329 100%
======== ======== ======== ========
MARGIN MARGIN MARGIN MARGIN
$ % $ % $ % $ %
-------- ------ -------- ------ -------- ------ -------- ------
Gross profit:
Proprietary $ 61,609 86% $ 33,565 86% $170,497 86% $ 83,028 81%
Generic 121,996 64% 137,854 50% 364,203 65% 398,390 45%
-------- -------- -------- --------
Total gross profit $183,605 70% $171,419 54% $534,700 70% $481,418 48%
======== ======== ======== ========
10
10. OTHER LIABILITIES
In fiscal 2002, the Company entered into a development agreement with the U.S.
Department of Defense for the development of the Adenovirus Vaccine Type 4 and
Type 7. Among other things, the contract provided for the Company to build a
dedicated facility for the development and future commercialization of the
vaccine. The Company's costs were reimbursed by the Department of Defense and
the reimbursements were treated as deferred revenues and classified in other
liabilities. In March 2005, the Company and the Department of Defense amended
the development agreement, resulting in a $10,000 write-down in both property,
plant and equipment and other liabilities.
11. INCOME TAXES
In March 2004, holders of warrants to purchase an aggregate of 3,375,000 shares
of the Company's common stock exercised the warrants in full through a cashless
exercise. The Company initially estimated that it would realize a cash tax
benefit of approximately $15,400 from this transaction. After further review of
the deduction available to the Company from this transaction, the Company
subsequently revised this estimate, increasing it by approximately $29,000 to a
total cash tax benefit of approximately $44,400. As a result, the Company
increased its deferred tax asset by $17,200, reduced its income taxes payable by
$11,800 and increased its additional paid in capital by $29,000.
11
12. 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:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004 2005 2004
-------- -------- -------- --------
Earnings per common share - basic:
Net earnings (numerator) $ 61,345 $ 35,139 $172,867 $108,743
-------- -------- -------- --------
Weighted average shares (denominator) 102,717 101,797 103,180 100,978
-------- -------- -------- --------
Earnings per common share-basic $ 0.60 $ 0.35 $ 1.68 $ 1.08
======== ======== ======== ========
Earnings per common share - diluted:
Net earnings (numerator) $ 61,345 $ 35,139 $172,867 $108,743
-------- -------- -------- --------
Weighted average shares 102,717 101,797 103,180 100,978
Effect of dilutive options and warrants 3,175 5,123 2,782 5,443
-------- -------- -------- --------
Weighted average shares - diluted (denominator) 105,892 106,920 105,962 106,421
-------- -------- -------- --------
Earnings per common share-diluted $ 0.58 $ 0.33 $ 1.63 $ 1.02
======== ======== ======== ========
2005 2004 2005 2004
---- ---- ----- ----
Not included in the calculation of diluted earnings
per share because their impact is antidilutive:
Stock options outstanding 76 5 1,749 48
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 earnings, the net changes in
unrealized gains and losses on securities classified for SFAS No. 115 purposes
as "available for sale," and the reversal of gains and losses included in net
earnings (reclassification adjustments) that were previously included in
comprehensive income. Total comprehensive income for the three months and nine
months ended March 31, 2005 and 2004 was as follows:
12
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -------------------
2005 2004 2005 2004
------- ------- -------- --------
Net earnings: $61,345 $35,139 $172,867 $108,743
Other comprehensive earnings
net of tax:
Net unrealized gains (losses)
on marketable securities (386) -- (1,191) --
Reclassification adjustments -- -- -- 179
------- ------- -------- --------
Comprehensive income $60,959 $35,139 $171,676 $108,922
======= ======= ======== ========
14. RELATED PARTIES
Dr. Bernard C. Sherman and Jacob M. Kay
Under certain arrangements, the Company purchases bulk pharmaceutical materials
and sells certain pharmaceutical products and bulk pharmaceutical materials to
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. In addition, 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.
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 (generic Prozac) patent challenge. Under this
agreement certain costs were shown as a reduction to operating expenses while
other costs were included as cost of sales.
Separately, the Company receives a royalty on a product marketed and sold by a
company controlled by Dr. Sherman.
13
The table below sets forth the statement of operations and balance sheet data
for transactions with companies owned or controlled by Dr. Sherman for the
three- and nine-month periods ended March 31, 2005 and 2004 and at March 31,
2005 and June 30, 2004:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -----------------
2005 2004 2005 2004
------ ------ ------ ------
Purchases from the Sherman Cos. $ -- $ 3 $5,575 $2,808
====== ====== ====== ======
Sales to the Sherman Cos. $2,666 $2,562 $7,633 $7,424
====== ====== ====== ======
Recovery of shared litigation costs
included in Operating expenses $ 138 $ 124 $ 207 $ 741
====== ====== ====== ======
Profit split charged to Cost of goods $ -- $1,376 $1,419 $1,712
====== ====== ====== ======
Royalty revenue $ 8 $ 64 $ 158 $ 220
====== ====== ====== ======
MARCH 31, JUNE 30,
2005 2004
--------- --------
Accounts receivable $2,696 $1,203
====== ======
Accrued liabilities $ -- $2,028
====== ======
15. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain properties and equipment for various periods under
operating leases. Future minimum rental payments, exclusive of taxes, insurance
and other costs, under non-cancelable leases with terms in excess of one year in
effect at June 30, 2004 are as follows:
FOR FISCAL YEARS ENDING JUNE 30,
2005 2006 2007 2008 2009 THEREAFTER
------ ------ ------ ------ ------ ----------
Operating leases $4,060 $4,297 $3,977 $3,376 $3,280 $18,775
Capital leases 1,868 1,692 856 204 95 32
------ ------ ------ ------ ------ -------
Minimum lease payments $5,928 $5,989 $4,833 $3,580 $3,375 $18,807
====== ====== ====== ====== ====== =======
Insurance
The Company's insurance coverage at any given time reflects market conditions
(including cost and availability) existing at the time it is written, and the
decision to
14
obtain insurance coverage or to self-insure varies accordingly. If the Company
were to incur substantial liabilities that are not covered by insurance or that
substantially exceed coverage levels or accruals for probable losses, there
could be a material adverse effect on our financial statements in a particular
period.
The Company utilizes a combination of self-insurance and traditional third-party
insurance policies to cover product liability claims. 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, which began on October 1, 2004 and ends on September 30,
2005, between an aggregate amount of $25,000 and $75,000. The Company is
self-insured for up to $25,000 of costs incurred relating to product liability
claims arising during the current policy period. 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; the Company would be responsible for
all product liability costs arising from these excluded products.
Legal Proceedings and Contingencies
-----------------------------------
The Company is involved in various claims and legal proceedings considered
normal to its business, including product liability, intellectual property and
other commercial litigation including antitrust actions. The Company records
accruals for such contingencies to the extent that it concludes a loss is
probable and the amount can be reasonably estimated. Additionally, the Company
records insurance receivable amounts from third party insurers when appropriate.
Many claims involve highly complex issues relating to causation, label warnings,
scientific evidence and other matters. Often these issues are subject to
substantial uncertainties and therefore, the probability of loss and an estimate
of the amount of the loss are difficult to determine. The Company's assessments
are based on estimates that the Company, in consultation with outside counsel,
believe are reasonable. Although the Company believes it has substantial
defenses in these matters, litigation is inherently unpredictable. Consequently,
the Company could in the future incur judgments or enter into settlements that
could have a material adverse effect on its consolidated financial statements in
a particular period.
Summarized below are the more significant matters pending to which the Company
is a party. As of March 31, 2005, the Company's reserve for the liability
associated with these claims or related defense costs is not material.
Patent Matters
Desogestrel/Ethinyl Estradiol Suit
In May 2000, the Company filed an abbreviated new drug application ("ANDA")
seeking approval from the FDA to market the tablet combination of
desogestrel/ethinyl estradiol
15
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 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. In addition, an adverse ruling likely would prohibit the Company from
continuing to sell its Kariva product.
Product Liability Matters
Hormone Therapy Litigation
The Company and/or its Duramed subsidiary have been named as a defendant in
approximately 3,000 personal injury product liability cases brought against the
Company and other manufacturers by plaintiffs claiming that they suffered
injuries resulting from the use of certain estrogen and progestin medications
prescribed to treat the symptoms of menopause. The cases against Barr and
Duramed involve either or both of the Company's Cenestin product or the use of
the Company's medroxyprogesterone acetate product, which typically has been
prescribed for use in conjunction with Premarin or other hormone therapy
products. All of these products remain approved by the FDA and continue to be
marketed and sold to customers. While Barr and/or Duramed have been named as
defendants in these cases, fewer than a third of the complaints actually allege
the plaintiffs took a product manufactured by Barr and/or Duramed, and our
experience to date suggests that, even in these cases, a high percentage of the
plaintiffs will be unable to demonstrate actual use of a Barr and/or Duramed
product. For that reason, by the end of March 2005, nearly 1,000 of the 3,000
cases had been dismissed and, based on discussions with the Company's outside
counsel, several hundred more are expected to be dismissed in the near future.
The Company believes it has viable defenses to the allegations in the complaints
and is defending the actions vigorously.
16
Anti-trust Matters
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 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.
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 into the 1997 settlement by the Texas Attorney
General's Office on behalf of a group of state Attorneys General was closed
without further action in December 2001.
All of the federal complaints were consolidated in the U.S. District Court for
the Eastern District of New York, which had been designated to handle the
multi-district Cipro litigation at the federal level (the "MDL Case"). In May
2003, the District Court ruled that the 1997 settlement did not constitute a per
se violation of the antitrust laws. At that time, the Court had rejected two of
plaintiffs' three legal theories. In March 2005, the District Court granted
summary judgment in the Company's favor, again rejecting a challenge to the
lawfulness of its 1997 settlement with Bayer. In granting summary judgment, the
District Court concluded that plaintiffs' remaining legal theory was also
17
insufficient as a matter of law. Plaintiffs are expected to appeal the District
Court's decision.
Of the state court lawsuits, two cases in New York and one case in Wisconsin
were dismissed at the outset, and appeals are now pending. Lawsuits remain
pending in California, Kansas, and Florida state courts, and all raise similar
challenges to the same 1997 settlement for which the U.S. District Court has
rejected antitrust and consumer protection claims as a matter of law. On April
13, 2005, the Superior Court of San Diego, California ordered a stay of the
California state class actions until after the resolution of any appeal in the
MDL Case. On April 22, 2005, the District Court of Johnson County, Kansas
similarly stayed the action before it, until after the resolution of any appeal
in the MDL Case. The Florida state class action remains at a very early stage,
with no status hearings, dispositive motions, pre-trial schedules, or a trial
date set as of yet.
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 the
remaining state court matters, and will vigorously defend any appeal of the MDL
Case. The Company anticipates that these matters may take several years to
resolve.
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.
Commercial Matters
Medicaid Reimbursement Cases
The Company, along with numerous other pharmaceutical companies, has been named
as a defendant in separate actions brought by the states of Alabama, Kentucky
and Illinois, the Commonwealth of Massachusetts, the City of New York, and the
following counties in New York: Albany, Allegany, Broome, Catteraugus, Cayuga,
Chautauqua, Chenango, Erie, Genesee, Greene, Herkimer, Monroe, Nassau, Oneida,
Onondaga, Rockland, Saratoga, St. Lawrence, Suffolk, Tompkins, Rensselaer,
Washington, Wayne,
18
Westchester, and Yates Counties. In each of these matters, the plaintiffs seek
to recover damages and other relief for alleged overcharges for prescription
medications paid for by their respective Medicaid programs. The Company believes
that it has not engaged in any improper conduct and is vigorously defending
itself.
Other Litigation
As of March 31, 2005, 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 outcome of these matters will not have a
material adverse effect on the Company's consolidated financial statements.
Indemnification
---------------
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 customary matters. If the indemnified party were to make a successful
claim pursuant to the terms of the indemnification agreement, the Company would
be required to reimburse the loss. The Company has historically not paid any
significant amounts under these arrangements and at March 31, 2005, the recorded
amounts for the estimated fair value of these indemnifications are not material.
16. SUBSEQUENT EVENT
On April 13, 2005, the Company announced that it had reached an agreement with
Kos Pharmaceuticals, Inc. ("Kos"), regarding the resolution of patent litigation
involving Kos' Niaspan(R) products that resulted in it entering into
Co-Promotion, Licensing and Manufacturing, and Settlement and License Agreements
with Kos.
Under the Co-Promotion Agreement, the Company will co-promote the current
Niaspan(R) and Advicor(R) products, as well as future dosage formulations,
strengths or modified versions of those products (the "Products"), to
obstetricians, gynecologists and other practitioners with a focus on women's
healthcare in the United States using a Duramed specialty sales force. Duramed
will double its specialty sales force from 20 to 40 sales representatives in
connection with co-promoting the Products, and Kos will provide training to the
specialty sales force. In return, the Company will receive a royalty on Kos's
sales of the Products.
Under the Licensing and Manufacturing Agreement, the Company will serve as a
stand-by, alternate supply source for Kos's Niaspan and Advicor products, and in
exchange will receive an upfront fee and quarterly fees thereafter. In addition,
should Kos utilize the Company as a supply source, the Company would receive an
agreed-upon supply price from Kos.
19
Under the Settlement and License Agreement, the Company will be able to launch
generic versions of the Products on September 20, 2013, about four years before
the last of the applicable Kos patents is set to expire. The Company will pay
Kos a royalty on a portion of its profits from the sale of generic versions of
the Products.
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 NINE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
REVENUES
The following table sets forth revenue data for the three and nine months ended
March 31, 2005 and 2004 (dollars in millions).
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------- ----------------------------------
CHANGE CHANGE
------------- --------------
2005 2004 $ % 2005 2004 $ %
------ ------ ------ ---- ------ -------- ------- ----
Generic products:
Distributed alternative brands(1) $ -- $ 84.7 (84.7) -100% $ -- $ 344.9 (344.9) -100%
Oral contraceptives 93.6 101.8 (8.2) -8% 295.7 288.6 7.1 2%
Other generic(2) 95.9 90.9 5.0 6% 265.6 259.8 5.8 2%
------ ------ ------ ------ -------- -------
Total generic products 189.5 277.4 (87.9) -32% 561.3 893.3 (332.0) -37%
Proprietary products 71.8 39.3 32.5 83% 198.8 102.0 96.8 95%
------ ------ ------ ------ -------- -------
Total product sales 261.3 316.7 (55.4) -17% 760.1 995.3 (235.2) -24%
Development and other revenue 3.7 4.4 (0.7) -16% 6.8 10.6 (3.8) -36%
------ ------ ------ ------ -------- -------
Total revenues $265.0 $321.1 $(56.1) -17% $766.9 $1,005.9 $(239.0) -24%
====== ====== ====== ====== ======== =======
(1) Reflects sales of Ciprofloxacin sold during Bayer's pediatric exclusivity
period which ended on June 9, 2004.
(2) Includes sales of Ciprofloxacin after June 9, 2004.
20
TOTAL PRODUCT SALES
Total product sales for the three and nine months ended March 31, 2005 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.
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 included in the "Other generic" line item in
the table above, and were insignificant for the three and nine months ended
March 31, 2005.
Oral Contraceptives
For the quarter ended March 31, 2005, sales of generic oral contraceptives
declined about 8% compared to the comparable prior year period. The
year-over-year comparisons were unfavorably impacted by a combination of (1)
prior year's total included launch quantities of Tri-Sprintec which were not
repeated and (2) lower pricing and lower market share for Tri-Sprintec, Aviane
and Apri due to increased competition. These factors were partially offset by
the launch of Aranelle in October 2004 and by market-share gains on certain
other existing products.
For the nine-month period ended March 31, 2005, generic oral contraceptives
sales increased by 2% as compared to the same period in the prior year. The
primary driver for the increase in the current period was three full quarters of
sales of Tri-Sprintec, which we launched in late December 2003. In addition,
contributions from Aranelle, which we launched in October 2004, partially offset
declines in other existing product sales, some of which have seen increased
competition since the same period in the prior year.
Other Generic Products
21
For the three and nine months ended March 31, 2005, other generic product sales
increased 6% and 2%, respectively, from the prior year period, as sales from new
products launched since the end of last year, including Didanosine and Metformin
XR 750mg, more than offset declines in other existing product sales. The decline
in existing product sales was primarily due to a significant decrease in sales
of our Dextroamphetamine group of products due to declining units and lower
prices caused by the launch of competing versions in late 2004. In April 2005,
our generic exclusivity period on Metformin XR 750mg ended and several other
generic companies launched competing versions of the product. As a result, we
expect a significant decline in Metformin XR 750mg product sales going forward.
Proprietary Products
For the quarter ended March 31, 2005, proprietary product sales increased 83%
from the prior year period. This increase was driven primarily by sales of
products we acquired during calendar 2004, including Loestrin/Loestrin Fe
(February 2004), Plan B (March 2004), Prefest(R) (November 2004 and Nordette
(December 2004) as well as by higher sales of SEASONALE which reflects higher
unit sales in support of prescription growth and higher pricing compared to last
year. These increases were partially offset by lower sales of Cenestin which
were negatively impacted by customer buying patterns.
For the nine-month period ended March 31, 2005, SEASONALE sales of $61 million
led to a 95% increase in total proprietary product sales compared to the same
period in the prior year. Additionally, sales from products acquired during the
year, as described above, more than offset lower sales of other proprietary
products.
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 arrangements.
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 nine months ended March 31, 2005 and 2004 (dollars in millions):
22
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------- -----------------------------------
CHANGE CHANGE
-------------- -----------------
2005 2004 $ % 2005 2004 $ %
----- ------ ------ ----- ------ ------ ------- -------
Generic products(1) $67.4 $139.6 $(72.2) -51.7% $197.1 $494.9 $(297.8) -60.2%
===== ====== ====== ====== ====== ======= ====
Gross margin(1) 64.4% 49.7% 64.9% 44.6%
Proprietary products $10.2 $ 5.7 $ 4.5 78.9% $ 28.3 $ 19.0 $ 9.3 48.9%
===== ====== ====== ====== ====== ======= ====
Gross margin 85.8% 85.5% 85.8% 81.4%
Total cost of sales $77.6 $145.3 $(67.7) -46.6% $225.4 $513.9 $(288.5) -56.1%
===== ====== ====== ====== ====== =======
Gross margin 70.3% 54.1% 70.6% 48.4%
(1) Results for the three and nine months ended March 31, 2004 include the
cost of purchasing Ciprofloxacin from Bayer, which we distributed as an
alternative brand through June 9, 2004.
The decrease in total cost of sales for the three and nine months ended March
31, 2005, 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
nine-month periods ended March 31, 2005 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 nine-month
periods ended March 31, 2005 due to an improved mix among our proprietary
products, resulting from increasing sales of certain higher-margin proprietary
products, primarily SEASONALE and Loestrin/Loestrin FE.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
The following table sets forth selling, general and administrative expense for
the three and nine months ended March 31, 2005 and 2004 (dollars in millions):
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------- ---------------------------------
CHANGE CHANGE
------------- -------------
2005 2004 $ % 2005 2004 $ %
------- ----- ----- ----- -------- ------ ------ ----
Selling, general and administrative $59.1 $56.5 $ 2.6 5% $181.8 $176.0 $ 5.8 3%
===== ===== ===== ====== ====== ======
Charges included in selling, general and
administrative $ -- $ 4.2 $(4.2) -100% $ -- $ 19.9 $(19.9) -100%
===== ===== ===== ==== ====== ====== ====== ====
Selling, general and administrative expenses for the current quarter were higher
than the prior year period primarily due to a $3.9 million increase in marketing
and selling expenses associated with certain of our propriety products and a
$2.4 million increase in amortization costs primarily related to recent product
acquisitions. The prior year period
23
included a write-off of $4.2 million associated with the acquisition of certain
emergency contraception assets and technologies from Gynetics, Inc. There was no
comparable write-off in the current period.
For the nine-month periods, the 3% increase in selling, general and
administrative expenses reflects higher selling and marketing costs primarily
due to an $11 million increase in marketing and promotion costs related to
SEASONALE and Plan B. This increase related to expanding our SEASONALE
direct-to-consumer advertising campaign and developing our promotion campaign
for Plan B, which we acquired in February 2004. Also, information technology
(IT) costs increased $4.7 million, reflecting the support of ongoing IT
projects, while amortization costs increased $5.7 million, primarily due to
product acquisitions made during the second quarter. The prior nine-month period
included a $15.7 million valuation allowance we established in September 2003
for loans we made to a former raw material supplier and the $4.2 million
write-off described above. There were no comparable charges in the current
nine-month period.
RESEARCH AND DEVELOPMENT
The following table sets forth research and development expenses for the three
and nine months ended March 31, 2005 and 2004 (dollars in millions):
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------- --------------------------------
CHANGE CHANGE
--------------- ---------------
2005 2004 $ % 2005 2004 $ %
----- ----- ------ ------ ----- ------ ------ ------
Research and development $35.5 $58.2 $(22.7) -39.0% $95.1 $144.8 $(49.7) -34.3%
===== ===== ====== ====== ===== ====== ====== ======
Charges included in research and development $ -- $32.6 $(32.6) -100.0% $ -- $ 68.2 $(68.2) -100.0%
===== ===== ====== ====== ===== ====== ====== ======
Research and development expenses for the quarter declined compared to the same
period last year primarily because acquisition-related charges incurred last
year were not repeated. In particular, the prior year included a charge of $22.3
million resulting from our acquisition of Schering's rights and obligations
under an existing product development and license agreement relating to the
oxybutynin transvaginal ring product for urinary incontinence that we had
assumed in connection with our Enhance Pharmaceuticals transaction in June 2002.
Additionally, we wrote-off $10.3 million for in-process research and development
acquired in connection with our acquisition of Women's Capital Corporation in
February 2004. Other R&D expenses increased $9.9 million in the three-month
period ended March 31, 2005 compared to the same period last year. The increase
was primarily driven by a $5.0 million payment to PLIVA related to the
development, supply and marketing agreement that we entered into in March 2005
for the generic biopharmaceutical Granulocyte Colony Stimulating Factor (G-CSF)
and a $2.7 million increase in the costs of bioequivalence studies, reflecting
both an increase in the number and costs of the studies.
24
For the nine-month period ended March 31, 2005, research and development
expenses decreased compared with last year. The prior nine-month period included
the charges mentioned above as well as a $35.6 million charge for the write-off
of in-process research and development costs related to the purchase of
substantially all the assets of Endeavor Pharmaceuticals in November 2003. Other
R&D expenses for the nine-month period ended March 31, 2005, increased $18.5
million compared to the prior year period, primarily from (1) the $5.0 payment
to PLIVA, (2) a $5.2 million increase in the costs of bioequivalence studies,
(3) $5.1 million in higher production and quality related costs related to the
increased number of bioequivalence studies, FDA submissions and validation
batches produced and a (4) $3.1 million increase in payments 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).
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 nine months
ended March 31, 2005 and 2004 (dollars in millions):
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ----------------------------
CHANGE CHANGE
----------- ------------
2005 2004 $ % 2005 2004 $ %
----- ----- ---- ---- ----- ----- ----- ----
Income tax expense $33.7 $26.3 $7.4 28.1% $97.1 $63.0 $34.1 54.1%
===== ===== ==== ==== ===== ===== ===== ====
Effective tax rate 35.5% 42.8% 36.0% 36.7%
The effective tax rates for the 2005 periods were favorably impacted by a
combination of (1) a higher rate in the prior year due to a $10.3 million
write-off of acquired in-process research and development that was not
deductible for federal income tax purposes, (2) the utilization of a capital
loss that had a valuation allowance in the current quarter and (3) a change in
the mix of income among the states where the Company has manufacturing
facilities.
Our federal income returns for fiscal years 2002 and 2003 are currently under
audit by the IRS. Although the audits are not finalized, we believe that their
resolution could favorably impact our rate in the fourth quarter but would not
have a material effect on our financial position or liquidity. Prior periods
have either been audited or are no longer subject to audit.
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, business
development activities and our share repurchase program.
25
Within the past year cash flows from operations have been more than sufficient
to fund our cash needs. At March 31, 2005, our cash, cash equivalents and
short-term marketable securities totaled $527.1 million, an increase of $74.9
million from our position at June 30, 2004.
Operating Activities
Our operating cash flows for the nine months ended March 31, 2005 were $256.9
million, compared with $196.0 million for the nine months ended March 31, 2004.
Components of the $256.9 million of operating cash flows in the first nine
months of this fiscal year include net earnings of $172.9 million and a $34.1
million decrease in accounts and 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. A decrease in
accounts payable, accrued expenses and other liabilities of $50.4 million was
largely a result of $38.0 million in payments to Solvay Pharmaceuticals under an
arbitration award in fiscal 2004. Income taxes payable increased by $18.4
million due to a higher tax provision resulting from increased earnings as well
as the timing of estimated tax payments.
In March 2004 holders of warrants to purchase an aggregate of 3,375,000 shares
of our common stock exercised the warrants in full through a cashless exercise.
We initially estimated that we would realize a cash tax benefit of approximately
$15.4 million from this transaction. After further review of the deduction
available to us from this transaction, we subsequently revised this estimate,
increasing it by approximately $29.0 million for a total cash tax benefit of
approximately $44.4 million. As a result, we increased our deferred tax assets
by $17.2 million, reduced income taxes payable by $11.8 million and increased
additional paid in capital by $29.0 million. The deferred tax asset of $17.2
million is expected to reduce income taxes payable over the next 12 years.
Investing Activities
Net cash used in investing activities decreased to $164.1 million during the
first nine months of fiscal 2005 from $205.2 million in the prior year period.
This decline resulted from fewer product and business acquisitions in the
current period. Notwithstanding this decline, we did have significant investing
activities in the first nine months of fiscal 2005, including the purchase of
product rights for Prefest(R) and Nordette(R) for $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 $42.9 million through the first nine months of fiscal 2005,
up from $36.9 million in the prior year period.
In the third quarter, we concluded that it was appropriate to reclassify our
investment in auction rate securities as short-term marketable securities.
Previously, such investments had been classified as cash and cash equivalents on
the balance sheet. Accordingly, we have revised our June 30, 2004 consolidated
balance sheet to reclassify $391 million of auction rate securities from cash
and cash equivalents to short-term marketable securities. We classify these
securities as "available-for-sale" as defined in SFAS 115, "Accounting
26
for Certain Investments in Debt and Equity Securities." We have also revised the
presentation of our consolidated statements of cash flows for the periods ended
March 31, 2005 and 2004 to reflect the gross purchases and sales of these
securities as investing activities rather as components of cash and cash
equivalents. This change in classification does not affect previously reported
cash flows from operating activities or financing activities in our consolidated
statements of cash flows nor does it have an affect our previously reported
consolidated statements of operations.
Financing Activities
Net cash used in financing activities totaled $106.6 million for the first nine
months of fiscal 2005 compared to $7.4 million of net cash provided by financing
activities in the prior year period. This $114.0 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 and the $12.2 million we used in the current period to
repay previously outstanding mortgage notes relating to our Cincinnati, Ohio
manufacturing facility. Under our share repurchase program, we are authorized by
the Board 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 $13.1
million in the first nine months of fiscal 2005, down from $21.9 million in the
prior year period.
Debt Repayments and Credit Availability
On August 30, 2004, we 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, we terminated our prior $40.0 million credit facility.
In February 2005, we made a $12.2 million payment in complete satisfaction of
mortgage notes held by a bank. The notes were secured by our Cincinnati, Ohio
manufacturing 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.
27
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 update of the provisions for estimated reductions to gross
revenues to show the amounts of various revenue dilution items at March 31, 2005
and June 30, 2004. We refer you to our Annual Report on Form 10-K for the fiscal
year ended June 30, 2004 and our Quarterly Report on Form 10-Q for the quarter
ended December 31, 2004 for a complete discussion of our "Critical Accounting
Policies" contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in those reports.
PROVISIONS FOR ESTIMATED REDUCTIONS FROM GROSS REVENUES
For each of the items listed below 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 March 31, 2005 and June 30, 2004 is set forth below (dollars in
millions):
MARCH 31, JUNE 30,
2005 2004
--------- --------
Accounts receivable reserves:
Returns and allowances $ 52.9 $ 57.5
Chargebacks 36.6 38.9
Rebates 49.5 39.3
Other 6.7 6.2
------ ------
Total $145.7 $141.9
====== ======
Accrued liabilities:
Medicaid rebates $ 11.3 $ 11.4
====== ======
28
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;
- our exposure to product liability and other lawsuits and
contingencies;
- the increasing cost of insurance and the availability of product
liability insurance coverage;
29
- 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
Our exposure to market risk for a change in interest rates relates primarily to
our investment portfolio of $589.9 million. We do not use derivative financial
instruments to hedge any risks or for speculative gain.
Our investment portfolio consists of cash and cash equivalents and market
auction debt securities classified as "available for sale." Our primary
investment objective 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 76%
of the portfolio matures within three months, or is subject to an interest-rate
reset date that occurs within 90 days. The carrying value of the investment
portfolio approximates the market value at March 31, 2005 and the value at
maturity. Because our 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.
None of our outstanding debt at March 31, 2005 bears interest at a variable
rate. Any borrowings under our $175.0 million unsecured revolving credit
facility will bear interest at a variable rate based on the prime rate, the
Federal Funds rate or LIBOR. At March 31, 2005, no amounts were drawn under this
facility.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
30
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 March 31, 2005, 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 March 31, 2005, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation Matters
The disclosure under Note 15-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
During the three months ended March 31, 2005, the Company did not repurchase any
of its common shares under its share repurchase program. At March 31, 2005, the
Company could repurchase another $200 million of its shares under its share
repurchase program, which is set to expire on December 31, 2005.
ITEM 6. EXHIBITS
(a) Exhibits.
31
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.
32
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.
Date: May 6, 2005
/s/ Bruce L. Downey
----------------------------------------
Bruce L. Downey
Chairman of the Board and Chief
Executive Officer
/s/ William T. McKee
----------------------------------------
William T. McKee
Vice President, Chief Financial Officer,
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
33