BARR PHARMACEUTICALS
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2005
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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)
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| Delaware
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42-1612474 |
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. – Employer
Identification No.) |
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400 Chestnut Ridge Road
Woodcliff Lake, New Jersey
(Address of principal executive offices)
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07677-7668
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201-930-3300
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class
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Name of each exchange on which registered: |
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| Common Stock, Par Value $0.01
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
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 R No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. R
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes R No £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes £ No R
The aggregate market value of the common equity held by non-affiliates of the Registrant
computed by reference to the price at which the common equity was last sold on December 31, 2004,
the last business day of the Registrant’s most recently completed second fiscal quarter, was
approximately $4,800,000,000. For purposes of this calculation, shares held by directors,
executive officers and 10% shareholders of the Registrant have been excluded. Such exclusion
should not be deemed a determination or an admission by the Registrant that these individuals are,
in fact, affiliates of the Registrant.
As of August 25, 2005, there were 106,446,844 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein,
is incorporated herein by reference from the registration’s definitive proxy statement relating to
the annual meeting of shareholders to be held in November 2005, which definitive proxy statement
shall be filed with the Securities and Exchange Commission within 120 days after the end of the
fiscal year to which this Report relates.
BARR PHARMACEUTICALS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2005
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PART I
Item 1. Business
Safe Harbor Statement
Forward-Looking Statements
This Annual Report on Form 10-K and the documents incorporated herein by reference contain
forward-looking statements based on expectations, estimates and projections as of the date of this
filing. Actual results may differ materially from those expressed in forward-looking statements.
See Item 7 of Part II—“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Forward-Looking Statements.”
Overview
Barr Pharmaceuticals, Inc. is a Delaware holding company whose principal subsidiaries, Barr
Laboratories, Inc. and Duramed Pharmaceuticals, Inc., develop, manufacture and market generic and
proprietary pharmaceutical products, respectively. For our fiscal year ended June 30, 2005, we
recorded net earnings of $215 million on revenues of $1 billion. Of our $1 billion of revenues in
fiscal 2005, $751 million were from sales of our generic
products, $279 million were from sales of our
proprietary products, and $17 million were attributed to revenues derived from co-promotion
alliances, development agreements and other sources.
Our business has two reportable segments: generic pharmaceuticals and proprietary
pharmaceuticals. In the generic pharmaceutical segment, we currently manufacture and distribute
more than 150 different dosage forms and strengths of over 75 different generic pharmaceutical
products, including 22 oral contraceptive products, representing the largest category of our
generic product portfolio.
In our proprietary pharmaceutical segment, we currently manufacture and distribute 13
proprietary pharmaceutical products, largely concentrated in the female healthcare arena. These
products include our SEASONALE® (levonorgestrel and ethinyl estradiol) extended-cycle
oral contraceptive product, our Cenestin® (synthetic conjugated estrogens, A) line of
hormone therapy products and our Plan B® emergency contraceptive (levonorgestrel)
product.
We operate manufacturing, research and development and administrative facilities that are
located in six locations within the United States. Our administrative offices are located in
Woodcliff Lake, New Jersey.
Our Internet address is www.barrlabs.com. On our Investor Relations portion of the web site we
post the following filings as soon as reasonably practicable after they are electronically filed
with or furnished to the SEC: our annual report on Form 10-K, our quarterly reports on Form 10-Q,
our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act. All such filings on our Investor Relations web site are
available free of charge.
Business Strategies
We focus our resources on three principal strategies:
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developing and marketing selected generic pharmaceuticals; |
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developing and marketing proprietary pharmaceuticals; and |
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pursuing development and marketing of generic biopharmaceuticals. |
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Developing and Marketing Selected Generic Pharmaceuticals
We develop and market the generic equivalent of brand pharmaceuticals. These products are
marketed under the Barr Laboratories, Inc. (“BARR”) label. We focus on generic products that have
one or more characteristics that we believe will make it difficult for other competitors to develop
competing generic products. The characteristics of the selected generic products we pursue may
include one or more of the following:
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those with complex formulation or development characteristics; |
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those requiring specialized manufacturing capabilities; |
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those where sourcing the raw material may be difficult; and |
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those that must overcome unusual regulatory or legal challenges, including patent challenges. |
We believe generic products with some or all of these characteristics may produce higher
returns for a longer period of time than products without these characteristics.
In connection with our generic products, we generally conduct studies to establish that our
product is bioequivalent to the brand product, and obtain legal advice that our product does not
infringe the patents of the owner of the New Drug Application (“NDA”) relating to that product or
of the innovator or that such patents are invalid or unenforceable and/or have expired. Approval
by the U.S. Food & Drug Administration (“FDA”) is required before a generic version of a previously
approved drug or certain new dosage forms of an existing drug can be marketed. Approval for such
products generally is sought using an Abbreviated New Drug Application (“ANDA”). In most cases,
bioavailability and bioequivalence studies, and not clinical studies, are required in support of an
ANDA. Bioavailability indicates the rate of absorption and levels of concentration of a drug in
the blood stream. Bioequivalence compares the bioavailability of one drug product with another
and, when established, indicates that the rate of absorption and levels of concentration in the
body are substantially equivalent to the previously approved reference listed drug. An ANDA may be
submitted for a drug product on the basis that it is the equivalent of a previously approved drug
product or, in the case of a new dosage form, that it is suitable for use for the indications
specified without the need to conduct additional safety or efficacy testing. We capitalize the
costs associated with certain products prior to such products receiving FDA final marketing
approval (“pre-launch inventories”). Each of our ANDA
submissions is made with the expectation
that: (i) the FDA will approve the marketing of the product therein described, (ii) we will
validate our process for manufacturing that ANDA product within the specifications that have been
or will be approved by the FDA and (iii) the cost of the inventory will be recovered from the
commercialization of our ANDA product.
The regulatory process for approval of an ANDA is discussed in greater detail below under
“Government Regulation — Abbreviated New Drug Application Process”.
Developing generic equivalents of branded pharmaceuticals that are protected by patents and
challenging those that we believe are invalid, unenforceable or not infringed by our competing
generic versions of these branded products has been an important part of our success in the past.
Successful patent challenges may result in gaining 180 days of market exclusivity for our generic
product, such as when we successfully challenged Eli Lilly’s patent on Prozac®, or in
settlements that allow us to market the products before the patents expire, such as the settlement
that resulted in our launch of a distributed brand alternative of Bayer’s Cipro® product
in June 2003, or our settlement with Kos Pharmaceuticals, Inc. in April 2005 that resulted in our
Niaspan®/Advicor® co-promotion agreements, as discussed below. As branded
pharmaceutical companies have increased the number of patents protecting their products, the number
of our generic products in development facing intellectual property issues and possible litigation
has also increased. In addition, several companies, including Barr have launched products prior to
the rendering of a final decision in their patent challenge litigation, a so-called
“at-risk-launch”. See “Pending Patent Challenges”.
As a percentage of our total product sales, sales of our generic products, including sales of
products manufactured for us and sold under distribution agreements, accounted for 94% in fiscal
2003, 89% in fiscal 2004,
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and 73% in fiscal 2005. The declining percentage over time reflects the increasing
contribution from our proprietary products over that same period.
Developing and Marketing Proprietary Pharmaceuticals
As part of our diversification strategy, we also develop, manufacture and market proprietary
pharmaceutical products under the Duramed Pharmaceuticals, Inc. (“Duramed”) label. These products
include both products that we develop internally and products that we acquire, whether through
license or an outright acquisition. Although the proprietary products that we develop involve
substantially higher risk to bring to market and more extensive research and development activities
on our part when compared with our generic products, they offer the potential for a longer period
of market or product exclusivity and greater returns than most of our generic products. The same
is true for the proprietary products that we acquire, although they involve less development risk.
Actively promoted proprietary products typically require greater sales and marketing expenses than
generic products because of the need to promote them directly to healthcare providers and in some
cases directly to consumers. An example of this is our SEASONALE® extended-cycle oral
contraceptive product that we launched in November 2003.
FDA approval is required before any new drug can be marketed. An NDA is a filing submitted to
the FDA to obtain approval of a new drug and must contain complete pre-clinical and clinical safety
and efficacy data or a right of reference to such data. Before dosing a new drug in healthy human
subjects or patients may begin, stringent government requirements for pre-clinical data must be
satisfied. The pre-clinical data, typically obtained from studies in animal species as well as from
laboratory studies, are submitted in an Investigational New Drug, or IND, application, or its
equivalent in countries outside the United States where clinical trials are to be conducted. The
pre-clinical data must provide an adequate basis for evaluating both the safety and the scientific
rationale for the initiation of clinical trials. Typically, we capitalize pre-launch inventories
associated with the filing of an NDA based on the same expectations as we have with an ANDA, but we
do not begin to capitalize costs until the related product candidates have an NDA filed or in the
case of components to an NDA product, the product development process has progressed to a point
where we have determined that the product has a high probability of regulatory approval.
The regulatory process for approval of an NDA is discussed in greater detail below under
“Government Regulation —New Drug Application Process.”
As a percentage of our total product sales, sales of our proprietary products accounted for 6%
in fiscal 2003, 11% in fiscal 2004 and 27% in fiscal 2005.
Pursuing Development and Marketing of Generic Biopharmaceuticals
We actively pursue those business development initiatives and internal development activities
that will enable us to bring generic versions of biopharmaceutical products to market and we intend
to build a leadership position in the development and marketing of such products in the future.
Biopharmaceuticals represent an industry with approximately $30 billion in annual sales, and more
than 150 biopharmaceutical products are on the market today. However, the FDA has not recognized
an abbreviated regulatory pathway for the timely and cost-efficient approval of generic versions of
biopharmaceutical products, many of which have lost patent protection or will lose patent
protection within the next several years. We are working with Congress, the Department of Health
and Human Services (“HHS”), including the FDA, and the generic industry’s trade association, the
Generic Pharmaceutical Association (“GPhA”), to help define the regulatory pathway for approval of
these products. We currently do not sell any generic biopharmaceutical products, though in March
2005 we entered into a development, supply and marketing agreement for the generic
biopharmaceutical G-CSF, which is discussed in greater detail in
“Business Development
Activities” below.
Investment in Research and Development
Our commitment to research and development, including acquired in-process research and
development, resulted in investments of $91 million in fiscal 2003, $169 million in fiscal 2004 and
$128 million in fiscal 2005. We have consistently made these significant investments because of our
belief that a broad portfolio of products in development is critical to our long-term success.
Research and development expenditures for generic development
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activities typically include those related to internal personnel, third-party bioequivalence
studies, costs paid to third-party development partners and costs for raw materials used in
developing products. Proprietary development costs typically include those related to internal
personnel, clinical studies, third-party toxicology studies, clinical trials conducted by
third-party clinical research organizations, and raw materials. We expect to continue to invest
aggressively in research and development projects in fiscal 2006 and beyond.
Business Development
To supplement our internal efforts in support of our business strategies, we continually
evaluate business development opportunities that we believe will strengthen our product portfolio
and help grow both our generic and proprietary businesses. We regularly evaluate opportunities,
particularly in the areas of strategic product acquisitions and/or corporate mergers and
acquisitions. We also evaluate partnership arrangements that may involve: new technology platforms
on which to expand our barrier to entry generic strategy, women’s healthcare products in late stage
development, and products or companies for a new, second proprietary therapeutic category. As we
continue our growth strategy, we expect that our business development activities, including product
and company acquisitions will continue to increase.
Significant Developments in Fiscal 2005
Agreements with Kos Pharmaceuticals, Inc.
In April 2005, we entered into Co-Promotion, Licensing and Manufacturing, and Settlement and
License Agreements with Kos Pharmaceuticals, Inc. (“Kos”) relating to the resolution of the patent
litigation involving Kos’ Niaspan® products.
Under the Co-Promotion Agreement, we are co-promoting Kos’ Niaspan® and
Advicor® products to obstetricians, gynecologists and other practitioners with a focus
on women’s healthcare in the United States. These products are marketed by our 43-person Duramed
Specialty Sales Force. We also have the right to co-promote future dosage formulations, strengths
or modified versions of Niaspan® and Advicor® products (the “Kos Products”).
In return, we receive a royalty on sales of the Kos’ Products.
Under the Licensing and Manufacturing Agreement, we serve as a stand-by, alternate supply
source for the Kos Products, and in exchange have received an upfront fee and will continue to
receive quarterly fees thereafter. In addition, should we supply product to Kos, we would receive
an agreed-upon supply price from Kos.
Under the Settlement and License Agreement, we will be able to launch generic versions of the
Kos Products on September 20, 2013, approximately four years before the last of the applicable Kos
patents is set to expire. We will pay Kos a royalty on a portion of our profits from the sale of
generic versions of the Kos Products.
Oral Contraceptive Portfolio
During fiscal 2005, we expanded our portfolio of generic and proprietary oral contraceptive
products through the launch of two new generic products and the acquisition of one proprietary
product. Currently, we market 22 generic and four proprietary oral contraceptive products. Our
oral contraceptive products compete against other generic and branded contraceptive products in an
approximately $3.8 billion market, based on industry source data for the twelve months ended June
2005. At June 30, 2005, we had a 31% prescription market share including generic and proprietary
oral contraceptives, based on industry source data for the twelve months ended June 2005.
Generic: We received approval for two new generic oral contraceptive products. In September
2004, we obtained approval for our Aranelle™ (norethindrone and ethinyl estradiol) oral
contraceptive product, the generic version of Watson Laboratories, Inc.’s Tri-Norinyl®.
In May 2005, we obtained approval for our Kelnor™ (ethynodiol diacetate and ethinyl
estradiol) oral contraceptive product, the generic version of Pfizer’s Demulen® 1/35-28.
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Proprietary: We added one proprietary oral contraceptive product to our product portfolio. We
acquired the exclusive rights in the United States to Nordette® (levonorgestrel acetate
and ethinyl estradiol) oral contraceptive product in December 2004.
Stock Repurchase Program
On August 5, 2004, our Board of Directors authorized the repurchase of up to $300 million of
common stock, at the discretion of our senior management, in the open market or in privately
negotiated transactions through December 31, 2005. Through June 30, 2005, we have repurchased $100
million of our shares under the repurchase program.
$175 Million Revolving Credit Facility
In August 2004, we entered into a new $175 million, five-year, senior unsecured revolving
credit facility with a bank group. Upon entering into the new credit facility, we terminated our
prior $40 million credit facility.
ERP System
Throughout fiscal 2005, we continued work to implement a company-wide enterprise resource
planning (“ERP”) system from SAP, designed to allow us to: (1) more efficiently manage corporate
activities; (2) more efficiently manage diverse product lines; (3) integrate mergers and
acquisitions more efficiently; and (4) support potential future international operations.
Currently, the SAP system is scheduled to be implemented utilizing a phased approach beginning in
October 2005. We expect the project to be completed by the end of fiscal 2006 and to cost up to
$70 million. To ensure this project is implemented in a timely fashion and on budget, we have
dedicated approximately 40 full-time employees to the project, along with third-party consultants.
Business Development Activities
We continually evaluate strategic business development opportunities that will strengthen and
help grow our business. We regularly evaluate opportunities in the following areas: strategic
product acquisitions, new technology arrangements including new technology platforms, and corporate
mergers and acquisitions. Set forth below is a list of our significant business development
activities during fiscal 2005.
Product Development Acquisitions/Licenses:
License for Cephalon’s ACTIQ®
On August 10, 2004, our Barr Laboratories subsidiary entered into an agreement with Cephalon,
Inc. that provides us with a license to manufacture and market a generic version of Cephalon’s
ACTIQ® (oral transmucosal fentanyl citrate) [C-II] cancer pain management treatment. The
license becomes effective on February 3, 2007, or earlier, depending on certain contingencies. The
agreement also obligates Cephalon to supply us with a Cephalon-manufactured product for resale if
we cannot obtain FDA approval of our ANDA for the generic product prior to the license’s effective
date. Under certain circumstances, the agreement also would provide us with the right to
manufacture and market a generic version of Cephalon’s proposed sugar-free formulation of
ACTIQ®.
Acquired Rights to Prefest®
On November 22, 2004, our Duramed subsidiary and King Pharmaceuticals, Inc. entered in to an
agreement under which we acquired the exclusive rights to manufacture and market
Prefest® (estradiol/norgestimate) Tablets hormone therapy in the United States from King
for approximately $15 million. Under the agreement, King assigned to Duramed regulatory approval
for the product in the United States. Barr and King were parties to pending patent litigation
regarding the patents related to Prefest®. Following our acquisition of
Prefest® from King, the Prefest® patent litigation was voluntarily dismissed.
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Acquired Rights to Nordette®
On December 28, 2004, our Duramed subsidiary acquired from King
Pharmaceuticals, Inc. the exclusive rights in the United States for Nordette®
(levonorgestrel and ethinyl estradiol) Tablets that are indicated for the prevention of pregnancy
in women who elect to use this product as a method of contraception. We acquired from King the
exclusive rights to manufacture and market Nordette® in the United States and King
assigned to Duramed regulatory approval for the product in the United States. We paid
approximately $12 million for the exclusive rights to Nordette®.
Development/Marketing Agreements:
Agreement with PLIVA on G-CSF
On March 30, 2005, our Barr Laboratories subsidiary and PLIVA Croatia Ltd. and PAM Kft.
entered into a development, supply and marketing agreement for the generic biopharmaceutical
Granulocyte Colony Stimulating Factor (G-CSF). The parties intend to develop and seek approval to
market the product in the United States and Canada as a generic version of Amgen’s
NEUPOGEN® (filgrastim) product that is primarily indicated for the regulation of white
blood cell production in the treatment of cancer patients with chemotherapy induced neutropenia.
Under terms of the agreement, we paid PAM Kft. $5 million upon signing, and will make additional
payments as additional milestones are achieved.
Generic Pharmaceuticals
Generic pharmaceutical products are the chemical and therapeutic equivalent of branded drug
products listed in the FDA publication entitled “Approved Drug Products with Therapeutic
Equivalence Evaluations,” popularly known in the pharmaceutical industry as the “Orange Book.” The
Drug Price Competition and Patent Term Restoration Act of 1984, as amended, which is known as the
“Hatch-Waxman Act”, has been largely credited with launching the generic drug industry. Among
other things, the Hatch-Waxman Act provides that generic drugs may enter the market upon approval
of an ANDA. ANDAs are abbreviated versions of NDAs that must be filed with the FDA for a branded
product. Generic drugs are bioequivalent to their brand-name counterparts, meaning they deliver the
same amount of active ingredient at the same rate as the brand-name drug. Accordingly, generic
products provide safe, effective and cost-efficient alternatives to branded products, typically at
a significantly lower price than the branded equivalent.
Research and Development
During fiscal 2005, we continued our commitment to develop and market generic products. More
specifically, during fiscal 2005, we:
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filed 9 ANDAs; |
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received FDA approvals for 11 generic products; |
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received tentative FDA approvals for an additional five generic products that
are related to patent challenge activities; and |
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launched seven new generic products. |
At June 30, 2005, we had approximately 35 ANDAs, including tentatively approved applications,
pending at the FDA targeting branded pharmaceutical products with an estimated $10 billion in sales
for the 12 months ended June 30, 2005, based on industry source data.
We are committed to maintaining a full pipeline of generic products and have continued to
increase our investment in generic research and development in support of this commitment. We have
a significant number of full-time employees working in the areas of research and development,
manufacturing, production and quality assurance/control, who help support our generic drug
activities.
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We traditionally have developed generic pharmaceuticals in tablet and capsule forms. During
the past year, we have devoted significant research and development resources to developing new
dosage forms for our generic products. We are actively developing these generic products, both on
our own and through agreements with third parties, using delivery technologies such as patches,
rings, creams, injectables, nasal sprays, and sterile ophthalmics. In addition, we are developing
generic products that would be delivered through our transvaginal ring (TVR) technology.
Products We Currently Market
We currently market approximately 75 generic pharmaceutical products in approximately 150
dosage forms and strengths. Presently, our products are manufactured in tablet, capsule and powder
form. Examples of the generic products we currently market are set forth below:
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Apri®
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Desogen®
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Female Healthcare |
(Desogestrel and Ethinyl Estradiol)
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Ortho-Cept® |
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Aviane®
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Alesse®
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Female Healthcare |
(Levonorgestrel and Ethinyl Estradiol) |
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Claravis™
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Accutane®
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Dermatology |
(Isotrentinoin) |
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Amphetamine Salts Combination
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Adderall®
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Psychotherapeutics |
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Dextroamphetamine Sulfate
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Dexedrine® Spansule®
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Psychotherapeutics |
Extended Release Capsules |
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Didanosine Delayed-Release Capsules
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Videx® EC
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Antiviral |
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Kariva®
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Mircette®
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Female Healthcare |
(Desogestrel and Ethinyl Estradiol) |
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Lessina®
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Levlite®
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Female Healthcare |
(Levonorgestrel and Ethinyl Estradiol) |
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Methotrexate
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Rheumatrex®
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Rheumatology |
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Metformin HCl Extended Release Tablets
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Glucophage® XL
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Diabetes |
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Mirtazapine Orally Disintegrating Tablets
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Remeron® Soltabs®
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Psychotherapeutics |
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Nortrel® 7/7/7
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Ortho-Novum® 7/7/7
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Female Healthcare |
(Norethindrone and Ethinyl Estradiol) |
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Sprintec®
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Ortho-Cyclen®
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Female Healthcare |
(Norgestimate and Ethinyl Estradiol) |
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Tri-Sprintec®
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Ortho Tri-Cyclen®
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Female Healthcare |
(Norgestimate and Ethinyl Estradiol) |
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Warfarin Sodium
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Coumadin®
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Cardiovascular |
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Set forth below are descriptions of certain generic products that contributed significantly to
our sales and gross profit in fiscal 2005. Product data are derived from industry sources.
Oral Contraceptives. Oral contraceptives are the most common method of reversible birth
control, used by up to 82% of women in the United States at some time during their reproductive
years. Oral contraceptives have a long history with widespread use attributed to many factors
including efficacy in preventing pregnancy, safety and simplicity in initiation and
discontinuation, medical benefits and relatively low incidence of side effects. We currently
manufacture and market 22 generic oral contraceptive products under trade names, two of which we
launched during the fiscal year ended June 30, 2005. Our generic oral contraceptives compete with
the branded versions of the products, and in most instances, with other generic products and/or
authorized generic versions of the branded product. Authorized generics involve the brand
pharmaceutical maker either marketing a “generic” version of its brand product itself or licensing
its brand drug to a company that then markets it as a generic product.
Our most significant generic competitor in this category is Watson Pharmaceuticals, Inc., a
large independent generic pharmaceutical company that markets and distributes a sizeable portfolio
of generic oral contraceptive products. Additional generic competitors include Teva Pharmaceutical
Industries, a global pharmaceutical company that currently markets two generic oral contraceptive
products through an alliance with Andrx Corporation, and a small, privately held pharmaceutical
company that distributes authorized generic versions of two oral contraceptive products that we
manufacture and market.
Sales of our portfolio of 22 generic oral contraceptives were down slightly in fiscal 2005
compared to fiscal 2004, due to lower pricing and lower volumes resulting from new and increased
competition and a slow-down of generic substitution rates in this category, even as certain
products within our portfolio gained market share. Sales from our generic oral contraceptives will
likely experience a further decline in fiscal 2006, as these trends continue. However, we believe
that our large portfolio of generic oral contraceptives will remain a significant component of our
total revenues.
Didanosine Delayed-Release Capsules. Our Didanosine product is the generic equivalent of
Bristol-Myers Squibb’s Videx® EC (Didanosine) Delayed-Release capsules. In combination
with other anti-retroviral agents, the Didanosine product is indicated for the treatment of HIV-1
infections in adults. Having launched the product on December 15, 2004, we market Didanosine
Delayed-Release capsules in 200 mg, 250 mg and 400 mg strengths. Our ANDA contained a
certification that the Orange Book patents on the drug were invalid, unenforceable or would not be
infringed by our product (a so-called “paragraph IV certification”). Following FDA notification of
acceptance for filing, we notified Bristol-Myers Squibb, the NDA holder, and the National Institute
of Health (NIH), the patent owner, of our ANDA filing. No action was filed against us within the
45-day period specified in the Hatch-Waxman Act. We were the first applicant to file an ANDA
containing a paragraph IV certification for the product and, consequently, under the provisions of
Hatch-Waxman, were granted 180 days of generic exclusivity. Currently, we market the only generic
version of this product.
Warfarin Sodium. Our Warfarin Sodium product is the generic equivalent of Bristol-Myers
Squibb’s Coumadin, an anticoagulant for patients with heart disease and/or high risk of stroke. We
launched Warfarin Sodium in July 1997 and are presently one of three generic suppliers of the
product.
Claravis™ (Isotretinoin Capsules). Our Claravis is the generic equivalent of Roche
Pharmaceuticals Accutane® capsules for the treatment of severe recalcitrant nodular
acne. We market the 10 mg, 20 mg and 40 mg strengths under the Claravis trade name. We launched our
product in May 2003. Currently, Claravis competes in a market that includes two additional generic
isotretinoin products and Roche’s Accutane product. Claravis, which is prescribed for the treatment
of severe recalcitrant nodular acne that is not responsive to other treatments, is known to cause
birth defects and prescribed under a highly restrictive risk management program. Manufacturers and
marketers of isotretinoin products, in cooperation with the FDA, are currently implementing an
enhanced risk management program that is designed to minimize fetal exposure to isotretinoin. The
enhanced risk management program, which is being implemented in stages, will replace the existing
risk management program starting on January 1, 2006.
10
Pending Patent Challenges
As part of our generic development activities, we develop generic versions of select branded
products where we believe the patents relating to the brand products are invalid, unenforceable, or
not infringed by our competing generic products. Utilizing the patent challenge process under the
Hatch-Waxman Act, we seek to invalidate patents or to obtain a declaration that our generic version
does not infringe the patent. Our development activities in this area, including sourcing raw
materials and developing equivalent products, are designed to obtain FDA approval for our product.
Our legal activities in this area, performed by outside counsel, are designed to eliminate the
barrier to market entry created by the patents.
For a detailed discussion of FDA regulations and court decisions regarding patent challenges,
and for a discussion of certain patent challenges that have been concluded to date, see “Government
Regulation — Patent Challenges”.
As of June 30, 2005, we had publicly disclosed the following patent challenges that are in
various stages of litigation:
| |
|
|
|
|
|
|
| |
|
Sales |
|
|
Therapeutic |
| |
|
In $ Millions* |
|
|
Category |
| |
|
|
Allegra® & Allegra® D Products |
|
$ |
1,874 |
|
|
Antihistamines |
(Fexofenadine Hydrochloride and
Fexofenadine Hydrochloride &
Pseudoephedrine Hydrochloride) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Evista® |
|
$ |
717 |
|
|
Female Healthcare |
(Raloxifene Hydrochloride) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adderall XR® |
|
$ |
873 |
|
|
ADHD |
(Amphetamine Salts Combination) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provigil® |
|
$ |
496 |
|
|
Narcolepsy |
(Modafinil) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ortho Tri-Cyclen® Lo |
|
$ |
284 |
|
|
Oral Contraceptive |
(Norgestimate/Ethinyl Estradiol) |
|
|
|
|
|
|
|
|
|
|
|
|
|
ZYPREXA® Zydis® |
|
$ |
241 |
|
|
Psychotherapeutic |
(Olanzipine) |
|
|
|
|
|
|
|
|
|
|
|
|
|
ACTIQ® |
|
$ |
406 |
|
|
Oncology |
(Fentanyl Citrate) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Yasmin® |
|
$ |
372 |
|
|
Oral Contraceptive |
(Drospirenone & Ethinyl Estradiol) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Razadyne® |
|
$ |
245 |
|
|
Alzheimer’s |
(Galantamine Hydrobromde) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,508 |
|
|
|
|
|
|
| * |
|
Source:IMS Health last twelve months sales ended June 30, 2005 |
11
In addition to the patent challenges listed above, we are involved in on-going litigation
related to two products that we launched following the receipt of favorable summary judgment
rulings from the lower trial courts. We launched both of these products “at risk”, meaning prior
to the rendering of a final decision in the patent challenge litigation by the appellate courts. As
patent challenge litigation takes longer to complete, we anticipate that in the future we may
launch additional products “at risk”. The patent challenge litigation related to the two products
launched “at risk” are described below:
Kariva®, our generic version of Organon’s Mircette, is indicated for the prevention
of pregnancy. We launched the product following a District Court ruling that our product did not
infringe the patent of the brand product. In April 2003, the Court of Appeals reversed the District
Court’s decision and remanded the case for further proceedings. As a result, the patent challenge
case involving Kariva has not been finally resolved. On June 15, 2005 we entered into a
non-binding Letter of Intent (“LOI”) with Organon (Ireland) Ltd., Organon USA and Savient
Pharmaceuticals, Inc. to acquire the NDA for Mircette, obtain a royalty free patent license to
promote Mircette in the United States and dismiss all pending litigation between the parties in
exchange for a payment by us of up to $155 million. The total amount to be paid by us may be reduced
if the transaction does not close by September 15, 2005. In July 2005, the parties made the
required filing with the Federal Trade Commission (FTC) regarding the proposed transaction. On
August 1, 2005, the FTC issued a “second request” to the parties, seeking additional information
about the transaction. The parties are currently in the process of responding to this request.
The second request signals possible FTC concerns about a proposed
transaction and raise doubts about whether the proposal as structured will be consummated at all.
If the FTC objects to the proposal, the parties cannot agree to potential conditions required by
the FTC or the parties cannot negotiate definitive agreements, the proposed transaction could be
terminated. In the absence of a transaction substantially similar to the one proposed, we expect
to continue to vigorously defend our position in the Mircette litigation. See Item 3, Legal
Proceedings and Note 17 to the consolidated financial statements for a further description of this
matter.
Desmopression Acetate, our generic version of Ferring B.V.’s DDAVP® Tablets, 0.1 mg
and 0.2 mg, is indicated as antidiuretic replacement therapy in the management of central diabetes
insipidus and for the management of the temporary polyuria and polydipsia following head trauma or
surgery in the pituitary region. It is also indicated for the management of primary nocturnal
enuresis. In February 2005, a District Court ruled that the patent alleged to cover DDAVP is
unenforceable and not infringed by our product. The Court’s decision ended the 30-month stay and
allowed the FDA to approve our product on July 1, 2005. We launched our product immediately upon
receiving FDA approval. In February 2005, Ferring B.V. filed an appeal of the District Court’s
decision and we expect the Federal Circuit to hold an oral argument on Ferring’s appeal in Fall
2005. Because we are selling the products “at risk”, we could be liable for damages if the District
Court is reversed on appeal. See Item 3, Legal Proceedings, for a further description of this
matter.
Sales and Marketing
We market our generic products to customers in the United States and Puerto Rico under the
“Barr Laboratories, Inc.” label through an integrated sales and marketing team that includes a
four-person national accounts sales force. The activities of the sales force are supported by our
marketing and customer service organization in our Woodcliff Lake, New Jersey offices.
Customers
The customer base for our generic products includes drug store chains, supermarket chains,
mass merchandisers, wholesalers, distributors, managed care organizations, mail order accounts,
government/military and repackagers.
We sell our generic products to approximately 145 customers that purchase directly from us,
and indirectly to approximately 90 customers that purchase our products from wholesalers. Sales to
customers who accounted for 10% or more of our generic sales during the three years ended June 30,
were as follows:
12
| |
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
|
2003 |
McKesson Drug Company |
|
23% |
|
24% |
|
21% |
Cardinal Health |
|
17% |
|
14% |
|
17% |
Amerisource Bergen |
|
11% |
|
* |
|
13% |
Walgreens |
|
* |
|
13% |
|
11% |
|
|
|
| * |
|
Denotes less than 10% in the period indicated. |
Proprietary Pharmaceuticals
We develop our proprietary pharmaceutical products through internal efforts or through
company, product and/or technology platform acquisitions. Our proprietary products are marketed
under the “Duramed Pharmaceuticals, Inc.” label and several are promoted directly to healthcare
providers and in some cases consumers. Proprietary products often are patent-protected or benefit
from other non-patent market exclusivities. These market exclusivities generally allow proprietary
products to maintain higher profitability for longer periods of time than generic products. If a
proprietary product has achieved physician and customer loyalties, it will often remain profitable
even following the onset of generic competition, but generate lower profits than it realized prior
to generic competition.
Research and Development
We focus our proprietary product development activities in three areas:
| |
• |
|
patent-protected proprietary products in late stages of development; |
| |
| |
• |
|
existing chemical compounds where the development of new forms (liquid vs. tablets,
different dosages or other drug delivery systems, such as our proprietary, novel vaginal
ring delivery system) offer therapeutic or marketing advantages; and |
| |
| |
• |
|
new chemical entities in selected therapeutic categories, including some that are
marketed in other countries but not currently sold in the United States. |
Our proprietary development activities are currently focused primarily on expanding our
portfolio of female healthcare products including oral contraceptives and treatments for
menopause/perimenopause and endometriosis, through internal development and business development
activities. An important part of our product development strategy in the area of female healthcare
is to develop a broad line of products designed to meet the unmet medical needs of women. We are
also pursuing two urology products, one that utilizes our transvaginal ring technology to treat
urinary incontinence, and a second that is an oral product targeted to treat the symptoms
associated with the treatment of prostate cancer. In addition, we are developing two oral vaccine
products to prevent Adenovirus (Types 4 & 7) infections in U.S. military personnel under contract
with the Department of Defense (DOD). We continue to identify other proprietary product candidates
that further expand our product offerings in these areas and are actively evaluating additional
therapeutic categories to add to our proprietary portfolio.
As a result of internal development and business development activities, at the end of fiscal
2005 we had a broad pipeline of short, mid- and long-term opportunities that include several
proprietary products in clinical development, one of which is in Phase III studies, and four NDAs
pending at the FDA.
The four proprietary product applications pending at the FDA are:
| |
• |
|
a supplemental NDA (“sNDA”) for Over-the-Counter (“OTC”) status for the Plan
B® emergency contraceptive; |
| |
| |
• |
|
a NDA for Bijuva™ Synthetic Conjugated Estrogens Vaginal Cream; |
13
| |
• |
|
a NDA for SEASONIQUE™ (levonorgestrel/ethinyl estradiol tablets 0.15 mg/0.03
mg and ethinyl estradiol tablets 0.01 mg) extended-cycle oral contraceptive; and |
| |
| |
• |
|
a NDA for SEASONALE® Lo (levonorgestrel/ethinyl estradiol tablets 0.10
mg/0.02 mg and ethinyl estradiol tablets) extended-cycle oral contraceptive. |
Our proprietary research and development team has experience in managing clinical development
programs and regulatory matters. This team works closely and leverages synergies with our generic
formulation, manufacturing and regulatory groups.
Products We Currently Market
We currently market 13 proprietary products, which are:
| |
• |
|
Aygestin® (Norethindrone Acetate) for amenorrhea |
| |
| |
• |
|
Cenestin® (Synthetic Conjugated Estrogens, A) hormone therapy |
| |
| |
• |
|
Diamox® Sequels® (Acetazolamide) for glaucoma |
| |
| |
• |
|
Loestrin®/Loestrin® Fe (Norethindrone Acetate and Ethinyl Estradiol) oral contraceptives |
| |
| |
• |
|
Nordette® (Levonorgestrel and Ethinyl Estradiol) oral contraceptive |
| |
| |
• |
|
Plan B® (Levonorgestrel) emergency oral contraceptive |
| |
| |
• |
|
Prefest® (Etradiol/Nogestimate) hormone therapy |
| |
| |
• |
|
Revia® (Naltrexone Hydrochloride) for alcohol dependence |
| |
| |
• |
|
SEASONALE® (Levonorgestrel and Ethinyl Estradiol) extended-cycle oral contraceptive |
| |
| |
• |
|
Trexall™ (Methotrexate) for rheumatoid arthritis |
| |
| |
• |
|
ViaSpan® (Cold Storage Solution) transplant preservation agent |
| |
| |
• |
|
Zebeta® (Bisprolol Fumarate) for hypertension |
| |
| |
• |
|
Ziac® (Bisoprolol Fumarate and Hydrochlorothiazide) for hypertension |
SEASONALE®. Our NDA for SEASONALE, an extended-cycle oral contraceptive indicated
for the prevention of pregnancy, was approved by the FDA on September 5, 2003 and was granted a
three-year New Product Exclusivity, which expires in September 2006. We also may be eligible to
obtain an additional six months of market exclusivity on SEASONALE by performing pediatric research
on the product. For fiscal year 2005, we recorded sales for SEASONALE of $87 million and filled
over 807,000 prescriptions, an increase over sales of $25 million and 170,000 prescriptions filled
in fiscal 2004 (with the prescription data based on industry sources for the twelve months ended
June 2004 and June 2005).
The majority of oral contraceptive products currently available in the United States are based
on a regimen of 21 treatment days of active ingredient and then a seven-day placebo interval. By
contrast, under the SEASONALE extended-cycle regimen, women take the active product for 84
consecutive days, and then have a seven-day placebo interval. The SEASONALE regimen results in only
4 menstrual cycles per year, or one per “season”.
Our 250-person Women’s Healthcare Sales Force details SEASONALE to approximately 40,000
healthcare providers who we have determined to be among the most productive prescribers of oral
contraceptive products in the United States. Marketing support includes professional education
materials, medical education initiatives, published data from our clinical studies demonstrating
the safety and efficacy of the extended-cycle concept, and product sampling kits that contain
extensive information for patients. We reinforce our detailing activities with a trade-advertising
program in leading medical journals and a direct-to-consumer (“DTC”) advertising campaign
(including television advertising), and leading general interest publications.
14
Over the last year, the FDA’s Office of Medical Policy Division of Drug Marketing, Advertising
and Communications (“DDMAC”) has been reassessing industry guidelines for DTC advertisements to
ensure that they do not minimize risks or make unsubstantiated product claims. We anticipate that
DDMAC will require DTC advertisements to focus more on education and less on product promotion. In
this environment, we received a letter from DDMAC in December 2004 related to our television
commercial for SEASONALE. In its letter DDMAC raised several issues with our commercial, all of
which we addressed and re-submitted to the FDA.
SEASONALE was developed under a patent license from the Medical College of Hampton Roads,
Eastern Virginia Medical School (“EVMS”). Under the terms of the patent licensing agreement, we
had the option of paying a perpetual royalty to EVMS based on a percentage of net profits, or
exercising our right to make a one-time payment to EVMS, in lieu of future royalty payments, prior
to the first anniversary of the FDA approval date for SEASONALE. In September 2004, we exercised
this option and paid $19 million to EVMS. As a result, we now hold the patent covering SEASONALE,
which expires in 2017.
In June 2004, EVMS (then still the patent holder) and Barr received notification that Watson
Laboratories had filed an ANDA containing a paragraph IV certification asserting that the patent
covering SEASONALE is invalid, unenforceable or would not be infringed by Watson’s generic product.
Neither Barr nor EVMS initiated patent infringement litigation with respect to Watson’s ANDA. As
a result, Watson’s generic version of SEASONALE may be launched
as a competing product when our new product exclusivity expires in September
2006, or six months later if we are successfull in obtaining
pediatric exclusivity.
In July 2004, EVMS submitted the patent covering the SEASONALE extended-cycle oral
contraceptive product for reissue with the Patent and Trademark Office (“PTO”). At this time, as
the current patent holder, we have not received a determination from the PTO and believe that the
reissue process may take about two years from submission to complete. The patent covering SEASONALE
will remain in effect and continue to be listed in the FDA’s Orange Book while the PTO reviews the
request for reissuance. If the patent covering SEASONALE is reissued, it will have the same
remaining term as the existing patent that expires in 2017.
Cenestin®. Cenestin is indicated for the treatment of moderate-to-severe vasomotor
symptoms associated with menopause. We currently market the 0.3 mg, 0.45 mg, 0.625 mg, 0.9 mg and
1.25 mg tablet strengths of Cenestin and are developing other related products. The 0.3 mg tablet
strength of Cenestin is indicated for the treatment of vulvar and vaginal atrophy.
Cenestin competes in the $1.8 billion hormone therapy market with products such as Wyeth’s
Premarin®, a conjugated equine estrogens product. The hormone therapy market has
declined over the last several years as findings by the National Institutes of Health (“NIH”)
publicized in July 2002 have created uncertainty in the minds of many healthcare providers and
consumers regarding the risk/reward benefit of long-term hormone therapy products and has resulted
in a reduction in the use of hormone therapy products, including Cenestin. However, we believe that
a number of women and their healthcare providers will continue using and recommending these
products, particularly estrogen-only therapies such as Cenestin, for the short-term treatment of
various symptoms associated with menopause.
Plan B® Emergency Contraceptive. Plan B, which contains the synthetic progestin
levonorgestrel, is an emergency oral contraceptive that is intended to prevent pregnancy following
unprotected intercourse or contraceptive failure. To be effective, the product needs to be taken as
soon as possible within 72 hours. Plan B is currently available by prescription only in the U.S.,
although it is available without a prescription under pharmacy access programs at select pharmacies
in seven states.
As part of our acquisition of the outstanding shares of Women’s Capital Corporation (WCC) in
March 2004, we assumed responsibility for the Supplemental New Drug Application (sNDA) proposing
the switch of Plan B from prescription only to Over-The-Counter (OTC) status. On May 6, 2004, we
received a Not Approvable Letter from FDA, which noted that our application “did not provide
adequate data to support a conclusion that Plan B can be used safely by young adolescent women...
without professional supervision.” In response to the Not Approvable letter, we re-submitted our
sNDA in July 2004 to the FDA with information supporting the marketing of Plan B as a
prescription-only product for women 15 years of age and younger and a nonprescription product for
women 16 years of age and older. In January 2005, the FDA informed us that it was unable to
complete its review of the sNDA to market the Plan B® emergency contraceptive OTC by the
January 21st Prescription Drug User Fee Act (PDUFA)
15
date. In August 2005, we received a letter from the FDA that stated that “the Center for Drug
Evaluation and Research . . . has completed its review of this application, as amended, and has
concluded that the available scientific data are sufficient to support the safe use of Plan B as an
OTC product.... for women who are 17 years of age and older.” Notwithstanding this clear scientific
determination, the FDA delayed any action on the application. Instead, the FDA informed us that it
intends to seek public comment on issues related to the approval of a product that has OTC status
for patients 17 and older and prescription status for patients 16 and under. In its communication
with us, the FDA did not commit to any timetable for initiating or concluding the rulemaking
proceeding. We continue to market Plan B as a prescription-only emergency contraceptive, and
continue to educate consumers and healthcare providers about its availability.
As an on-going part of our product acquisition strategy, we have made opportunistic
acquisitions of mature branded products, through litigation settlements, licensing agreements or
direct acquisitions. While sales of these mature products tend to decline over time, we have
undertaken some marketing for select products in an effort to maintain sales levels. Such product
acquisitions made over the past years include: Aygestin®, Diamox®
Sequels®, Loestrin® and Loestrin® Fe, Nordette®,
Prefest®, Revia®, Ziac® and Zebeta®.
Products in Development
We have several proprietary products in clinical development in multiple product categories.
Examples of these products are discussed in detail below.
Female Healthcare
Oral Contraception:
SEASONIQUE™. In December 2004, we received notification that the FDA had accepted
our NDA for SEASONIQUE™ (levonorgestrel/ethinyl estradiol tablets 0.15 mg/0.03 mg and
ethinyl estradiol tablets 0.01 mg) extended-cycle oral contraceptive for review. Under the
SEASONIQUE™ extended-cycle regimen, women would take active tablets of 0.15 mg
levonorgestrel/0.03 mg of ethinyl estradiol for 84 consecutive days, followed by seven days of 0.01
mg of ethinyl estradiol. In August 2005, the FDA issued an Approvable letter for our
SEASONIQUE™ application. To achieve final approval, the FDA has requested that we
provide additional data to support SEASONIQUE’s unique regimen of 84 days of combination therapy,
followed by seven days of unopposed estrogen. We are working closely with the FDA to provide them
with the additional data they have requested. If approved, we will market SEASONIQUE™
extended-cycle oral contraceptive for the prevention of pregnancy.
SEASONALE®
Lo. In June 2005, we filed an NDA for a lower strength of
SEASONALE®, which we intend to market under the name SEASONALE® Lo. Under
the SEASONALE® Lo extended-cycle regimen, women would take active tablets of 0.10 mg
levonorgestrel/0.02 mg of ethinyl estradiol for 84 consecutive days, followed by seven days of
placebo. SEASONALE® Lo was studied as part of the SEASONALE® clinical
trials.
Hormone Therapy/Estrogen Therapy:
Enjuvia™
(Synthetic Conjugated Estrogen, B). In November 2003, we completed the
acquisition of the development-stage Enjuvia (synthetic conjugated estrogen, B) products from
Endeavor Pharmaceuticals. Enjuvia has the nine major components of Wyeth’s Premarin conjugated
estrogens product, as well as Delta 8,9-dehydroestrone sulfate, an estrogenic compound found only
in Premarin. In May 2004, we received FDA approval for our Enjuvia™ 0.625mg and 1.25 mg
tablet strengths products and in December 2004 we received approval for our 0.3 mg and 0.45 mg
tablet strengths products. All strengths are indicated for the treatment of vasomotor symptoms. We
intend to launch these products in fiscal 2006. An application for the 0.9 mg strength of Enjuvia
is being prepared. The patent on Enjuvia expires in 2020.
Bijuva™
(Synthetic Conjugated Estrogens, A) Cream. In June 2004, we filed an NDA
for Bijuva™ (Synthetic Conjugated Estrogens, A) vaginal cream product. In April 2005,
the FDA issued a Not Approvable letter for our Bijuva™ application. We are working with
FDA to identify the additional information needed to support the Bijuva™ application. If approved, we
intend to market Bijuva™ for the treatment of moderate to severe symptoms of vulvar and
vaginal atrophy associated with menopause.
16
Transvaginal Ring (TVR) Products:
We have several products in early stages of development based on our proprietary, novel, TVR
drug delivery system. Specifically, our development efforts are focused on products that treat
endometriosis, fertility, fibroids, labor and delivery, and urinary incontinence.
Urology
Oxybutynin TVR. We are currently developing a urinary incontinence product utilizing our TVR
technology. The TVR product offers the potential to deliver higher doses of oxybutynin to the
bladder neck with lower systemic exposure. This product is in Phase IIB development.
CyPat™. Cyproterone acetate, which, if approved, we intend to market in the United
States under the name CyPat, is a steroid that blocks the action of testosterone. Cyproterone
acetate is not currently approved for marketing in the United States. Internationally, cyproterone
acetate is mainly used in the management of prostate cancer, both as a single agent and in
combination with other products. In addition, it is used as a component of oral contraceptives and
in the treatment of acne, seborrhea, hirsutism in women, precocious puberty in children, and
hypersexuality/deviant behavior in men. Currently, Cyproterone acetate is approved for use in over
80 countries throughout Europe, Asia, South America, Australia and North America.
Vaccines
Adenovirus Vaccines. We are developing Adenovirus Vaccines Type 4 and 7 under a $42.3 million,
six-year contract awarded in September 2001 by the United States Department of Defense (“DOD”).
The Adenovirus Vaccines are intended to be dispensed to armed forces recruits to prevent epidemics
of an acute respiratory disease that has been a leading cause of hospitalizations of military
trainees. In July 2003, we completed construction of our Adenovirus Vaccine Virus Types 4 and 7
manufacturing and packaging facility, a 20,000 square foot building designed specifically to
produce these vaccines. The facility is located on our Virginia manufacturing and distribution
campus. We have initiated clinical trials and at the end of fiscal 2005 had completed Phase I
studies. In addition to supplying the vaccine to the armed forces, we have the right to market the
product to other populations, such as immunosuppressed patients, and foreign markets where the same
needs exist as with the DOD.
Sales And Marketing
Our proprietary products are marketed under the “Duramed Pharmaceuticals, Inc.” label by two
sales teams: our Women’s Healthcare Sales Force and our
Specialty Products Sales Force.
Women’s Healthcare Sales Force
Our
250-person Women’s Healthcare Sales Force currently promotes SEASONALE®
our Cenestin® hormone therapy products and
our Plan B® emergency contraceptive product to female healthcare practitioners. This
sales force may market additional female healthcare products we are developing or may acquire.
Specialty Products Sales Force
We doubled the size of our Specialty Products Sales Force to 43 by the end of fiscal 2005.
This sale force promotes our Trexall™ product directly to rheumatologists and
dermatologists; Kos’ Niaspan® and Advicor® cholesterol treatments to
obstetricians, gynecologists and other practitioners with a focus on women’s healthcare; and SEASONALE® to obstetricians, gynecologists and
other practitioners with a focus on women’s healthcare. The promotion of Niaspan® and
Advicor® is the result of a co-promotion agreement with Kos discussed above.
17
Customers
The customer base for our proprietary products includes drug store chains, supermarket chains,
mass merchandisers, wholesalers, distributors, managed care organizations, mail order accounts, and
the government/military. Sales to customers who accounted for 10% or more of our proprietary sales
over the last three fiscal years ended June 30, were as follows:
| |
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
|
2003 |
McKesson Drug Company |
|
25% |
|
21% |
|
15% |
Cardinal Health |
|
18% |
|
20% |
|
19% |
AmeriSource Bergen |
|
10% |
|
15% |
|
11% |
Generic Biopharmaceuticals
As we evaluate new product development and new technologies to expand our generic and
proprietary operations, we are also investing in the effort to open an exciting new frontier for
future growth: generic biopharmaceuticals.
Biopharmaceuticals represent one of the fastest growing segments of the pharmaceutical
industry, with sales in 2004 of approximately $30 billion, based on industry source data, with more
than 150 biopharmaceuticals on the market, including human insulin, interferons, human growth
hormones and monoclonal antibodies. In 2004, 40 new biopharmaceutical products were approved,
compared to just two in 1982, according to figures published by the Biotechnology Industry
Organization. There are more than 370 biotech drug products and vaccines currently in clinical
trials targeting more than 200 diseases including cancer, Alzheimer’s, heart disease, multiple
sclerosis, AIDS and arthritis. Biopharmaceuticals are a major driver of increasing prescription
drug costs. This area represents a major growth opportunity for Barr, and the generic
pharmaceutical industry as a whole.
There are, however, three major challenges in pursuing generic biopharmaceuticals: regulatory
challenges; intellectual property challenges; and scientific/manufacturing challenges. The key
regulatory challenge facing us is that the FDA has not recognized an abbreviated regulatory pathway
that would enable the timely and cost-efficient approval of generic versions of biopharmaceuticals.
We are working with Congress and the FDA to overcome this barrier. We are committed to pursuing the
approval of products through what we believe is a pathway that currently exists, given that select
biopharmaceuticals were historically approved under current law. We are also committed to working
towards a second, streamlined regulatory approval process that will ensure we can bring generic
versions of biopharmaceutical products to market that have been approved under the
biopharmaceutical approval pathway in place since 1997.
Because biopharmaceuticals are highly complex, brand innovators have protected the
intellectual property associated with all aspects of biopharmaceutical development and
manufacturing, including processes, characterization, naturally occurring by-products of
biopharmaceutical raw material production and processes related to scale-up, manufacturing and
analysis of the purity, quality and efficacy of the finished product. We believe that we are well
situated, in terms of our experience with complex intellectual property issues, to overcome patent
and other barriers to the introduction of these products.
To support our efforts in this area, we are actively pursuing the identification of sources
for biopharmaceutical active ingredients, as well as exploring potential partnerships and product
acquisitions as we work to bring generic biopharmaceuticals to market. An example of our partnering
strategy is our March 2005 agreement with PLIVA to develop and market a generic version of G-CSF in
the United States and Canada, as discussed above.
While we do not expect to launch a generic version of a biopharmaceutical for some time, nor
can we predict the timing of an FDA approval pathway for generic biopharmaceutical products, we are
taking the steps to position ourselves as a leader in this potential market.
18
Significant Product Sales; Geography
The table below sets forth for each of the last three fiscal years those products, or classes
of products that accounted for 10% or more of our total product sales during the last three fiscal
years ended June 30:
| |
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
|
2003 |
Oral contraceptives (generic and proprietary) |
|
54% |
|
34% |
|
31% |
Ciprofloxacin |
|
* |
|
30% |
|
12% |
Tamoxifen |
|
* |
|
* |
|
14% |
|
|
|
| * |
|
Denotes less than 10% in the period indicated. |
Presently, all of our operations are located within the United States. Over the last three
fiscal years, sales of our products have been primarily to our direct customers located within the
United States.
Raw Materials & Manufacturing Suppliers
We purchase the bulk pharmaceutical chemicals and raw materials that are essential to our
business from numerous U.S. and foreign suppliers. We also purchase certain finished dosage form
products, such as our Plan B emergency contraceptive and our ViaSpan® transplant
preservation agent, from third-party suppliers. As we previously described, our generic product
development strategy includes identifying products where there are a limited number of raw material
suppliers.
Arrangements with foreign suppliers are subject to certain additional risks, including
obtaining governmental clearances, export duties, political instability, currency fluctuations and
restrictions on the transfer of funds. In addition, the DEA regulates allocation to us of raw
materials used in the production of controlled substances based on historical sales data. Any
inability to obtain raw materials or finished products on a timely basis, or any significant price
increases that cannot be passed on to customers, could adversely affect us. Because prior FDA
approval of raw material suppliers or product manufacturers is required, if raw materials or
finished products from an approved supplier or manufacturer were to become unavailable, the
required FDA approval of a new supplier could cause a significant delay in the manufacture or
supply of the affected drug product.
Patents and Proprietary Rights
We file patent applications and obtain patents to protect our products, technologies,
inventions and improvements that we consider important to the development of our business. We also
rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities
to develop and maintain our competitive position. Preserving our trade secrets and protecting our
proprietary rights are important to our long-term success.
From time-to-time, we may find it necessary to initiate litigation to enforce our patent
rights, to protect our trade secrets or know-how or to determine the scope and validity of the
proprietary rights of others. Litigation concerning patents, trademarks, copyrights and proprietary
technologies can often be protracted and expensive and, as with litigation generally, the outcome
is often uncertain.
Government Regulation
We are subject to extensive regulation by the FDA, the DEA and state governments, among
others. The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act, the Prescription
Drug Marketing Act and other federal statutes and regulations govern or influence the testing,
manufacturing, safety, labeling, storage, record keeping, approval, marketing, advertising and
promotion of our products. Non-compliance with applicable requirements can result in fines, recalls
and seizure of products.
19
Abbreviated New Drug Application Process
FDA approval is required before a generic equivalent can be marketed. We seek approval for
such products by submitting an ANDA to the FDA. When processing an ANDA, the FDA waives the
requirement of conducting complete clinical studies, although it normally requires bioavailability
and/or bioequivalence studies. “Bioavailability” indicates the rate and extent of absorption and
levels of concentration of a drug product in the blood stream needed to produce a therapeutic
effect. “Bioequivalence” compares the bioavailability of one drug product with another, and when
established, indicates that the rate of absorption and levels of concentration of the active drug
substance in the body are equivalent for the generic drug and the previously approved drug. An ANDA
may be submitted for a drug on the basis that it is the equivalent of a previously approved drug
or, in the case of a new dosage form, is suitable for use for the indications specified.
Before approving a product, the FDA also requires that our procedures and operations conform
to Current Good Manufacturing Practice (“cGMP”) regulations, relating to good manufacturing
practices as defined in the U.S. Code of Federal Regulations. We must follow the cGMP regulations
at all times during the manufacture of our products. We continue to spend significant time, money
and effort in the areas of production and quality testing to help ensure full compliance with cGMP
regulations.
If the FDA believes a company is not in compliance with cGMP, sanctions may be imposed upon
that company including:
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• |
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withholding from the company new drug approvals as well as approvals for supplemental
changes to existing applications; |
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• |
|
preventing the company from receiving the necessary export licenses to export its
products; and |
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• |
|
classifying the company as an “unacceptable supplier” and thereby disqualifying the
company from selling products to federal agencies. |
We believe we are currently in compliance with cGMP regulations.
The timing of final FDA approval of an ANDA depends on a variety of factors, including whether
the applicant challenges any listed patents for the drug and whether the brand-name manufacturer is
entitled to one or more statutory exclusivity periods, during which the FDA may be prohibited from
accepting applications for, or approving, generic products. In certain circumstances, a regulatory
exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved
on the patent expiration date. For example, in certain circumstances the FDA may extend the
exclusivity of a product by six months past the date of patent expiry if the manufacturer
undertakes studies on the effect of their product in children, a so-called pediatric extension.
The pediatric extension results from a 1997 law designed to reward branded pharmaceutical companies
for conducting research on the effects of pharmaceutical products in the pediatric population. As
a result, under certain circumstances, a branded company can obtain an additional six months of
market exclusivity by performing pediatric research.
In May 1992, Congress enacted the Generic Drug Enforcement Act of 1992, which allows the FDA
to impose debarment and other penalties on individuals and companies that commit certain illegal
acts relating to the generic drug approval process. In some situations, the Generic Drug
Enforcement Act requires the FDA to not accept or review ANDAs for a period of time from a company
or an individual that has committed certain violations. It also provides for temporary denial of
approval of applications during the investigation of certain violations that could lead to
debarment and also, in more limited circumstances, provides for the suspension of the marketing of
approved drugs by the affected company. Lastly, the Generic Drug Enforcement Act allows for civil
penalties and withdrawal of previously approved applications. Neither we nor any of our employees
have ever been subject to debarment.
20
Patent Challenges
We actively challenge patents on branded pharmaceutical products where we believe such patents
are invalid, unenforceable, or not infringed by our competing generic products. Our development
activities in this area, including sourcing raw materials and developing equivalent products, are
designed to obtain FDA approval for our product. Our legal activities in this area, performed
primarily by outside counsel, are designed to eliminate the barriers to market entry created by the
patents. Under the Hatch-Waxman Act, the first generic ANDA applicant whose filing includes a
certification that a listed patent on the brand name drug is invalid, unenforceable, or not
infringed (a so-called “paragraph IV certification”), may be eligible to receive a 180-day period
of generic market exclusivity. This period of market exclusivity may provide the patent challenger
with the opportunity to earn a significant return on the risks taken and its legal and development
costs. Patent challenge product candidates typically must have several years of remaining patent
protection to ensure that the legal process can be completed prior to patent expiry. Because of the
potential value of being the only generic in the market for the 180-day generic exclusivity period,
we typically seek to be the first company to file an ANDA containing a paragraph IV certification
for a targeted product.
The process for initiating a patent challenge begins with the identification of a drug
candidate and evaluation by qualified legal counsel of the patents purportedly protecting that
product. We have reviewed a number of potential challenges and have pursued only those that we
believe have merit. Our general practice is to disclose patent challenges after the patent holder
has sued us. Thus, at any time, we could have several undisclosed patent challenges in various
stages of development.
Patent challenges are complex, costly, and can take three to six years to complete. As a
result, we have in the past and may elect in the future to have partners on selected patent
challenges. These arrangements typically provide for a sharing of the costs and risks, and
generally provide for a sharing of the benefits of a successful outcome. In addition, our patent
challenges may result in settlements that we believe are reasonable, lawful, and in our
shareholders’ best interests.
Over the past couple of years the use of so-called “authorized” generics has increased
significantly. Authorized generics involve the brand pharmaceutical maker either marketing a
“generic” version of its brand product itself or licensing its brand drug to a company which then
markets it as a generic product. Because the “authorized” generic is not sold under an ANDA, but
rather is sold under the brand pharmaceutical maker’s NDA, the courts have held it can compete
against the patent challenger’s generic product during the 180-day exclusivity period that results
from a patent challenge.
Patent Challenge Process
The Hatch-Waxman Act offers an incentive to generic pharmaceutical companies that challenge
suspect patents on branded pharmaceutical products. The legislation recognizes that there is a
potential for non-infringement of an existing patent or the improper issuance of patents by the
United States Patent and Trademark Office, or PTO, resulting from a variety of technical, legal, or
scientific factors. The Hatch-Waxman legislation places significant burdens on the challenger to
ensure that such suits are not frivolous, but also may offer the opportunity for significant
financial reward if successful.
All of the steps involved in the filing of an ANDA with the FDA, including research and
development, are identical with those taken in development of any generic drug. At the time an ANDA
is filed with the FDA, the generic company that wishes to challenge the patent files a paragraph IV
certification. After receiving notice from the FDA that its application is accepted for filing, the
generic company sends the patent holder and NDA owner a notice explaining why it believes that the
patents in question are invalid, unenforceable, or not infringed. If the patent holder and NDA
owner bring suit in federal district court against the generic company to enforce the challenged
patent within 45 days of the receipt of the notice from the generic company, the Hatch-Waxman Act
provides for an automatic stay of the FDA’s authority to grant the approval that would otherwise
give the patent challenger the right to market its generic product. This stay is set at 30 months,
or such shorter or longer period as may be ordered by the court. The 30 months may or may not, and
often does not, coincide with the timing of a trial or the expiration of a patent. The discovery,
trial, and appeals process can take several years.
21
Under the Hatch-Waxman Act, the developer of a generic drug that files the first ANDA
containing a paragraph IV certification may be eligible to receive a 180-day period of generic
market exclusivity. This period of market exclusivity may provide the patent challenger with the
opportunity to earn a return on the risks taken and its legal and development costs.
The FDA adopted regulations implementing the 180-day generic marketing exclusivity provision
of the Hatch-Waxman Act. However, over the years, courts have found various provisions of the
regulations to be in conflict with the statute. For example, in Mova Pharmaceutical Corp. v.
Shalala, 140 F.3d 1060 (D.C. Cir. 1998), the court of appeals held that the Hatch-Waxman Act
required generic exclusivity to be awarded to the first generic company to file an ANDA containing
a paragraph IV certification, regardless of whether that company prevailed in a court challenge to
the relevant patent before another company was ready for approval. In contrast, the FDA’s
regulations had required the first patent challenger to successfully defend its challenge to the
patent before another generic company was ready to receive approval. In Mylan Pharmaceuticals v.
Shalala, 81 F. Supp. 2d 30 (D.D.C. 2000), the court found that the statute requires the 180-day
generic period to commence on the date of the first court decision in favor of the generic
applicant, even if the first successful decision was a district court decision finding the
challenged patent invalid, unenforceable, or not infringed and the innovator company appealed the
court’s decision. The decision was in contrast to the FDA’s regulation under which the exclusivity
period would not commence until the appellate court affirmed the district court’s invalidity,
unenforceability, or non-infringement ruling.
In December 2003, the Medicare Prescription Drug, Improvement, and Modernization Act (“MMA”)
was signed into law that included provisions clarifying Hatch-Waxman and generic exclusivity
related to patent challenges. The MMA includes several provisions regarding the patent challenge
process designed to level the playing field for generic companies. Generally speaking, the MMA
provisions apply when the first ANDA containing a paragraph IV certification was filed after
December 8, 2003. These reforms included:
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• |
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Only one 30-month stay allowed per drug. |
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• |
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Product-by-product exclusivity. |
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• |
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Shared 180-day exclusivity in limited circumstances. |
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• |
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Counterclaim for an Orange Book delisting allowed. |
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• |
|
180-day exclusivity cannot be triggered by a district court decision. |
First, under the MMA, only patents submitted to the FDA before an ANDA is filed can result in
a 30-month stay. No additional 30-month stay can be obtained on patents listed in the Orange Book
after the ANDA has been filed. Second, exclusivity is expressly on a product-by-product basis,
meaning that there will only be one 180-day exclusivity period per listed drug. Third, because
exclusivity is product-by-product, shared exclusivity will result only when multiple companies
submit the first ANDA containing a paragraph IV certification on the same day. Fourth, ANDA
applicants now have the ability to challenge the propriety of a patent listing. If an ANDA
applicant is sued, the company can now bring a counterclaim seeking to have a patent delisted from
the Orange Book. Finally, for ANDAs where the first paragraph IV certification was filed before
December 8, 2003, the 180-day exclusivity period cannot be triggered by a district court decision
that is on appeal. Where the first paragraph IV ANDA was submitted after the enactment of the MMA,
exclusivity can only be triggered by the first ANDA filer’s marketing of its own generic product or
a product made by the brand company. While exclusivity could be forfeited as a result of a court
decision, that court decision must either be an unappealed district court decision or an appellate
court decision. Where the first paragraph IV ANDA was submitted before December 8, 2003, Congress
reinstated FDA’s prior interpretation of “court decision,” meaning that exclusivity for such
applications can be triggered by first commercial marketing or by the appellate court’s affirmance
of an appealed district court’s ruling.
Our Patent Challenge History
Our efforts in the area of challenging patents on branded pharmaceutical products have
resulted in the successful conclusion of 11 out of 13 cases as of June 30, 2005. Successful
outcomes have included: court rulings in our favor invalidating patents or finding that our product
does not infringe; situations in which we have not been sued for patent infringement; and
settlements with the patent holder. Unfavorable outcomes have resulted from a loss resulting in our
not being able to launch our generic product until the patent on the brand pharmaceutical product
expires.
22
Examples of successful outcomes to our patent challenges include:
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• |
|
Niacin. Niacin is the generic equivalent of Kos Pharmaceuticals, Inc.’s
Niaspan® product. In April 2005, we entered into Co-Promotion, Licensing and
Manufacturing, and Settlement and License Agreements relating to the resolution of the
patent litigation involving Kos’ Niaspan® products. Under the terms of the
agreements, we: (1) co-promote the current Niaspan® and Advicor®
products (the “Kos Products”) to obstetricians, gynecologists and other practitioners with
a focus on women’s healthcare in the United States using our 43-person Duramed specialty
sales force; (2) serve as a stand-by, alternate supply source for the Kos Products, and in
exchange have received an upfront fee and will continue to receive quarterly fees
thereafter; and (3) are able to launch generic versions of the Kos Products on September
20, 2013, about four years before the last of the applicable Kos patents is set to expire. |
| |
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• |
|
Mirtazapine orally disintegrating tablets. Mirtazapine is the generic equivalent of
Organon, Inc.’s Remeron® Soltabs®. After the litigation against us
was dismissed, we launched our Mirtazapine product in December 2003 and enjoyed 180 days of
generic exclusivity. |
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| |
• |
|
Ortho Tri-Cyclen®. Ortho Tri-Cyclen is a regimen of oral contraceptives that
includes three different tablet combinations of norgestimate and ethinyl estradiol. In
August 2003 we settled pending litigation regarding Ortho-McNeil Pharmaceutical, Inc.’s
patents protecting Ortho Tri-Cyclen. Under the terms of the settlement, we launched our
generic version of Ortho Tri-Cyclen on December 29, 2003, approximately three months prior
to the expiration of pediatric exclusivity. |
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• |
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Fluoxetine. We invalidated the patent on Eli Lilly’s Prozac®, which enabled
us to launch our generic Fluoxetine product nearly three years earlier than would otherwise
have been possible and recorded sales of approximately $365 million in fiscal 2002 during
the 180-day period granted to us under the Hatch-Waxman Act. |
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• |
|
Ciprofloxacin. Ciprofloxacin is the generic name for Bayer’s antibiotic
Cipro®. In 1997, we entered into an agreement with Bayer to settle our patent
challenge litigation under which we distributed a brand alternative Ciprofloxacin product
from June 9, 2003 until June 9, 2004. We recorded sales of approximately $111 million in
fiscal 2003 and $385 million in fiscal 2004. |
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• |
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Tamoxifen Citrate. Tamoxifen Citrate is the generic name for AstraZeneca’s
Nolvadex®. In 1993, as a result of a settlement of a patent challenge against
AstraZeneca, we entered into a non-exclusive supply and distribution agreement. Under the
terms of the Tamoxifen agreement, we distributed a Tamoxifen Citrate product that we
purchased directly from AstraZeneca. The Tamoxifen agreement expired in August 2002. |
A loss in our patent litigation results in our not being able to launch our generic product
until the patent on the brand pharmaceutical product expires. An example of this follows:
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• |
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Trazodone Hydrochloride. Trazodone Hydrochloride is the generic name for Bristol-Myers
Squibb’s Desyrel®. We had sought to bring our generic version of Desyrel to
market but were unsuccessful in invalidating the patent. We launched our product in April
1999, following the expiration of the patent. |
New Drug Application Process
FDA approval is required before any new drug can be marketed. An NDA is a filing submitted to
the FDA to obtain approval of a new drug and must contain complete pre-clinical and clinical safety
and efficacy data or a right of reference to such data. Before dosing a new drug in healthy human
subjects or patients may begin, stringent government requirements for pre-clinical data must be
satisfied. The pre-clinical data, typically obtained from studies in animal species as well as from
laboratory studies, are submitted in an Investigational New Drug, or IND, application, or its
equivalent in countries outside the United States where clinical trials are to be conducted. The
pre-clinical data must provide an adequate basis for evaluating both the safety and the scientific
rationale for the initiation of clinical trials.
23
Clinical trials are typically conducted in three sequential phases, although the phases may
overlap.
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• |
|
In Phase I, which frequently begins with the initial introduction of the compound into
healthy human subjects prior to introduction into patients, the product is tested for
safety, adverse effects, dosage, tolerance absorption, metabolism, excretion and other
elements of clinical pharmacology. |
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• |
|
Phase II typically involves studies in a small sample of the intended patient population
to assess the efficacy of the compound for a specific indication, to determine dose
tolerance and the optimal dose range, and to gather additional information relating to
safety and potential adverse effects. |
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• |
|
Phase III trials are undertaken to further evaluate clinical safety and efficacy in an
expanded patient population at typically dispersed study sites, in order to determine the
overall risk-benefit ratio of the compound and to provide an adequate basis for product
labeling. |
Each trial is conducted in accordance with certain standards under protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to
be evaluated. Each protocol must be submitted to the FDA as part of the IND. In some cases, the FDA
allows a company to rely on data developed in foreign countries, or previously published data,
which eliminates the need to independently repeat some or all of the studies.
Data from pre-clinical testing and clinical trials are submitted to the FDA as an NDA for
marketing approval and to other health authorities as a marketing authorization application. The
process of completing clinical trials for a new drug may take several years and require the
expenditure of substantial resources. Preparing an NDA or marketing authorization application
involves considerable data collection, verification, analysis and expense, and there can be no
assurance that approval from the FDA or any other health authority will be granted on a timely
basis, if at all. The approval process is affected by a number of factors, primarily the risks and
benefits demonstrated in clinical trials as well as the severity of the disease and the
availability of alternative treatments. The FDA or other health authorities may deny an NDA or
marketing authorization application if the regulatory criteria are not satisfied, or such
authorities may require additional testing or information.
Even after initial FDA or other health authority approval has been obtained, further studies,
including Phase IV post-marketing studies, may be required to provide additional data on safety.
The post-marketing studies could be used to gain approval for the use of a product as a treatment
for clinical indications other than those for which the product was initially tested.
Also, the FDA or other regulatory authorities require post-marketing reporting to monitor the
adverse effects of the drug. Results of post-marketing programs may limit or expand the further
marketing of the products. Further, if there are any modifications to the drug, including changes
in indication, manufacturing process or labeling or a change in the manufacturing facility, an
application seeking approval of such changes must be submitted to the FDA or other regulatory
authority. Additionally, the FDA regulates post-approval promotional labeling and advertising
activities to assure that such activities are being conducted in conformity with statutory and
regulatory requirements. Failure to adhere to such requirements can result in regulatory actions
that could have an adverse effect on our business, results of operations and financial condition.
Drug Enforcement Agency
Because we sell and are currently developing several other products that contain controlled
substances, we must meet the requirements and regulations of the Controlled Substances Act, which
are administered by the DEA. These regulations include stringent requirements for manufacturing
controls and security to prevent diversion of or unauthorized access to the drugs in each stage of
the production and distribution process. The DEA regulates allocation to us of raw materials used
in the production of controlled substances based on historical sales data. We believe we are
currently in compliance with all applicable DEA requirements.
24
Medicaid
In November 1990, a law regarding reimbursement for prescribed Medicaid drugs was passed as
part of the Congressional Omnibus Budget Reconciliation Act of 1990. The law requires drug
manufacturers to enter into a rebate contract with the Federal Government. All generic
pharmaceutical manufacturers whose products are covered by the Medicaid program are required to
rebate to each state a percentage of their average net sales price for the products in question.
These percentages are currently 11% in the case of products sold by us which are covered by an ANDA
and 15% of products sold by us which are covered by an NDA. We accrue for these future estimated
rebates in our consolidated financial statements.
We believe that federal and/or state governments may continue to enact measures in the future
aimed at reducing the cost of providing prescription drug benefits to the public, particularly
senior citizens. We cannot predict the nature of such measures or their impact on our
profitability.
Medicare
Since June 2004, under the guidelines of the Medicare Part B benefit of the Medicare
Prescription Drug Improvement and Modernization Act of 2003, we have been paying rebates on two of
our proprietary products, Cenestin® and Trexall™, to various managed care
organizations and pharmacy benefit management companies (PBMs) that have received an endorsement
from the Centers for Medicare and Medicaid Services (CMS) as sponsors of one or more established
Medicare drug discount card programs. We have signed negotiated agreements with these entities
under which we have agreed to pay rebates and, in some cases administrative fees, based on the
wholesale acquisition cost (WAC) for units dispensed to eligible cardholders. In January 2006, a
Medicare Part D prescription drug benefit will take effect. We expect to finalize negotiated
rebate agreements involving Cenestin and/or Trexall with numerous Part D sponsors during the first
half of fiscal 2006.
Seasonality
Our business is not materially affected by seasonal factors.
Backlog
Due to the relatively short lead-time required to fill orders for our products, backlog of
orders is not material to our business.
Employees
Our success depends on our ability to recruit and retain highly qualified scientific and
management personnel. We face competition for personnel from other companies (including other
pharmaceutical companies), academic institutions, government entities and other organizations. As
of June 30, 2005, we had approximately 1,900 full-time employees. Approximately 90 of our employees
are represented by Local 2-149 of the Paper, Allied, Chemical and Energy (PACE) Union International
under a collective bargaining agreement that expires on March 31, 2011. We believe that our
relations with our employees are good and we have no history of work stoppages.
Competition
The pharmaceutical business is subject to intense competition. We compete with numerous
branded and generic pharmaceutical companies and face competition for both our generic and
proprietary products. Our competitors include:
| |
• |
|
the generic divisions and subsidiaries of brand pharmaceutical companies, including
Sandoz US, a subsidiary of Novartis AG; |
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• |
|
large independent domestic and international generic manufacturers including Mylan
Laboratories, Watson Pharmaceuticals, Inc., Teva Pharmaceuticals and distributors with
large product lines where there is competition with some of our products; |
25
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brand pharmaceutical companies whose therapies compete with our generic and proprietary
products, including Johnson & Johnson, Wyeth, Bristol-Myers Squibb and Eli Lilly &
Company. |
In the generic pharmaceutical environment, the expiration of patents and other market
exclusivities results in generic competitors, including Barr, entering the marketplace. Normally,
there is unit price decline as additional generic competitors enter the market and we may lose
market share. The timing of price decreases is unpredictable and can result in a significantly
curtailed period of profitability for a particular generic product. In addition, brand-name
manufacturers frequently take actions to prevent or discourage the use of generic equivalents.
These actions may include:
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filing new patents on drugs whose original patent protection is about to expire; |
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developing patented second-generation products such as controlled-release products or
other product improvements; |
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increasing marketing initiatives; |
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launching “authorized” generic versions of their branded products; and |
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commencing litigation. |
Generic pharmaceutical market conditions have been affected by industry consolidation and a
fundamental shift in industry distribution, purchasing and stocking patterns resulting in the
increased importance of sales to major chain drug stores and major wholesalers and a concurrent
reduction in sales to private label generic distributors.
Our proprietary pharmaceutical products compete with products manufactured by branded
pharmaceutical companies in competitive markets throughout the United States and Canada. The
competitive factors that impact this part of our business include product efficacy, safety, market
acceptance, price, marketing effectiveness, patent protection, and research and development of new
products. Our proprietary products often must compete with other products that already have an
established position in the market. If competitors introduce new products, delivery systems or
processes with therapeutic or cost advantages, our products could be subject to price reductions or
decreased volume of sales, or both. Our proprietary products may also face competition from
manufacturers of generic pharmaceuticals, following the expiration of non-patent product
exclusivities or a successful challenge to our patents.
To ensure our ability to compete effectively, we:
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focus our proprietary and generic product development in areas of historical strength or
competitive advantage; |
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target generic products for development that have unique characteristics, including:
difficulty in sourcing raw materials; difficulty in formulation or establishing
bioequivalence; and manufacturing that requires unique facilities, processes or expertise; |
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develop innovative, cost-effective proprietary products that serve unmet medical needs; and |
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make significant investments in plant and equipment to improve our efficiency. |
These strategies provide the basis for our belief that we will continue to remain a leading
independent specialty pharmaceutical company.
26
Insurance
Our insurance coverage at any given time reflects market conditions, including cost and
availability, existing at the time it is written, and the decision to obtain insurance coverage or
to self-insure varies accordingly. If we 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.
We utilize a combination of self-insurance and traditional third-party insurance policies to
cover product liability claims. On September 30, 2004, we elected to terminate the “finite-risk”
insurance arrangement that we had in place for two years, and in connection with such termination
increased our traditional third-party product liability coverage, as discussed below.
We maintain 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
million and $75 million. We are self-insured for the first $25 million of costs incurred relating
to product liability claims arising during the current policy period. In addition, we have
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;
we would be responsible for all product liability costs arising from these excluded products.
Environmental
We believe that our operations comply in all material respects with applicable laws and
regulations concerning the environment. While it is impossible to predict accurately the future
costs associated with environmental compliance and potential remediation activities, we do not
expect compliance with environmental laws to require significant capital expenditures nor do we
expect such compliance to have a material adverse effect on our consolidated financial statements.
Government Relations Activities
Because a balanced and fair legislative and regulatory arena is critical to the generic
pharmaceutical industry, we have and will continue to place a major emphasis in terms of management
time and financial resources on government affairs activities. We currently maintain an office and
staff a full-time government affairs department in Washington, D.C., which has responsibility for
coordinating state and federal legislative activities and coordinating with the generic industry
trade association and other associations, such as the National Association of Chain Drug Stores,
whose interests and goals are aligned with ours.
27
Item 2. Properties
We have facilities and operations in New York, New Jersey, Ohio, Pennsylvania, Virginia and
Washington, D.C. The following table presents the facilities owned or leased by us as of June 30,
2005 and indicates the location and principal use of each of these facilities:
| |
|
|
|
|
|
|
|
|
| |
|
Square |
|
|
|
|
| Location |
|
Footage |
|
Status |
|
Description |
NEW JERSEY |
|
|
|
|
|
|
|
|
Woodcliff Lake
|
|
|
90,000 |
|
|
Leased
|
|
Administrative Offices |
Upper Saddle River
|
|
|
20,000 |
|
|
Leased
|
|
Administrative Offices |
Northvale
|
|
|
27,500 |
|
|
Owned
|
|
Manufacturing |
Plainsboro
|
|
|
27,000 |
|
|
Leased
|
|
Research and Development, Administration |
|
|
|
|
|
|
|
|
|
NEW YORK |
|
|
|
|
|
|
|
|
Pomona 1
|
|
|
41,000 |
|
|
Owned
|
|
Research and Development, Laboratories, Manufacturing |
Pomona 2
|
|
|
133,000 |
|
|
Owned
|
|
Laboratories, Administrative Offices, Manufacturing, Warehouse |
Blauvelt
|
|
|
8,500 |
|
|
Leased
|
|
Warehouse |
|
|
|
|
|
|
|
|
|
OHIO |
|
|
|
|
|
|
|
|
Cincinnati
|
|
|
290,000 |
|
|
Owned
|
|
Manufacturing, Laboratories, Packaging |
|
|
|
|
|
|
|
|
|
PENNSYLVANIA |
|
|
|
|
|
|
|
|
Bala Cynwyd
|
|
|
39,000 |
|
|
Leased
|
|
Proprietary Research, Administrative Offices |
|
|
|
|
|
|
|
|
|
VIRGINIA |
|
|
|
|
|
|
|
|
Forest
|
|
|
375,000 |
|
|
Owned
|
|
Administrative Offices, Manufacturing,
Warehouse, Packaging,
Distribution, Laboratories,
Adenovirus Manufacturing Facility |
|
|
|
|
|
|
|
|
|
WASHINGTON D.C.
|
|
|
2,700 |
|
|
Leased
|
|
Government Affairs & Administrative Offices |
Over the past three fiscal years, we have spent approximately $183 million on capital
expenditures primarily to increase our production, laboratory, warehouse and distribution capacity.
We believe that our current facilities are in good condition and are being used productively. We
constantly assess our ongoing investments in property, plant and equipment to ensure that our
facilities are adequate for us to meet the expected demand of our pipeline products and to handle
increases in current product sales.
28
Item 3. Legal Proceedings
Patent Challenge Litigation
Desogestrel/Ethinyl Estradiol (Mircette®)
In May 2000, we filed an ANDA seeking approval from the FDA to market the tablet combination
of desogestrel/ethinyl estradiol tablets and ethinyl estradiol tablets, the generic equivalent of
Organon Inc.’s Mircette® oral contraceptive regimen. We 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 us from marketing the tablet combination. In December
2001, the District Court granted summary judgment in our favor, finding that our product did not
infringe the patent at issue in the case. BTG appealed the District Court’s decision. In April
2002, we launched our Kariva® product, the generic version of Mircette. One year later,
in April 2003, the U.S. Court of Appeals for the Federal Circuit reversed the District Court’s
decision granting summary judgment in our favor and remanded the case to the District Court for
further proceedings on, among other things, the issue of whether our product infringes BTG’s
patent.
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. We filed an answer to BTG’s amended complaint in July 2003. No trial date on
the infringement and damages issue has been set. We believe that our product does not infringe
BTG’s patent and, because of this, we continue to market and sell Kariva. Nevertheless, Organon
seeks to recover lost profits or a reasonable royalty of up to $100 million from the date of launch
through June 30, 2005. If BTG and Organon were to receive a favorable ruling in the District Court
and that ruling were to be upheld on any further appeal, we could be liable for patent
infringement, and the damages could be significant. Any such unfavorable outcome in the case could
adversely affect our consolidated financial statements.
On June 15, 2005 we entered into a non-binding Letter of Intent (“LOI”), with Organon
(Ireland) Ltd., Organon USA and Savient Pharmaceuticals, Inc. to acquire the NDA for Mircette,
obtain an exclusive, royalty free license to sell Mircette and Kariva in the United States and
dismiss all pending litigation between the parties in an exchange for a payment by us of up to
$155 million. The parties will not be contractually bound unless and until they negotiate and execute
definitive agreements and the pending anti-trust review is
satisfactorily resolved, as discussed below. If consummated, the
transaction would permit us to promote Mircette through our Duramed sales force, which could
increase sales of both Mircette and Kariva. If the transaction is not consummated, we expect
to continue to vigorously defend our position in the Mircette litigation.
In
July 2005, the parties made the required Hart Scott Rodino
filings with the Federal Trade Commission (“FTC”)
regarding the proposed transaction. On August 1, 2005, the FTC issued a “second request,” asking
us and Organon to provide detailed information concerning the proposed transaction. The second
request signals possible FTC concerns about the proposed transaction and creates additional
uncertainty whether the transaction will be consummated on the proposed, or other terms.
The
proposed transaction is contingent upon both satisfactory completion
of the FTC’s Hart Scott Rodino review and the negotiation of mutually satisfactory definitive agreements.
However, because the proposed transaction includes as one of its components a payment in settlement
of litigation, it is presumed under Generally Accepted Accounting Principles (“GAAP”) to give rise
to a “probable loss,” as defined in Statement of Financial Accounting Standards No. 5, “Accounting
for Contingencies”. In consultation with outside advisors and based on preliminary valuations
of the assets we would acquire if the transaction closes on the terms presently contemplated, we
have recorded a charge of $63.2 million as of June 30, 2005 to reflect the proposed litigation
settlement. We may reverse the charge, in whole or in part, in the future if the transaction does
not close and we prevail in the litigation or are ultimately held liable for a lesser amount of
damages. If the transaction does not close and an unfavorable verdict were to be rendered against
us at trial, the ultimate amount of damages payable by us could be significantly more or less than
the $63.2 million charge we have recorded in connection with the proposed litigation settlement.
29
Class Action Lawsuits
Ciprofloxacin
We were named as co-defendants with Bayer Corporation, The Rugby Group, Inc. and others in
approximately 38 class action complaints filed in state and federal courts by direct and indirect
purchasers of Ciprofloxacin (CiproÒ) from 1997 to the present. The complaints
alleged that the 1997 Bayer-Barr patent litigation settlement agreement was anti-competitive and
violated federal antitrust laws and/or state antitrust and consumer protection laws. A prior
investigation of this agreement by the Texas Attorney General’s Office on behalf of a group of
state Attorneys General was closed without further action in December 2001.
The lawsuits included nine consolidated in California state court, one in Kansas state court,
one in Wisconsin state court, one in Florida state court, and two consolidated in New York state
court, with the remainder of the actions pending in the United States District Court for the
Eastern District of New York for coordinated or consolidated pre-trial proceedings (the “MDL
Case”).
On March 31, 2005, the Court in the MDL case granted summary judgment in our favor and
dismissed all of the federal actions before it. On June 7, 2005, plaintiffs filed notices of
appeal to the United States Court of Appeals, but a briefing schedule and argument date have not
yet been set.
On September 19, 2003, the Circuit Court for the County of Milwaukee dismissed the Wisconsin
state class action for failure to state a claim for relief under Wisconsin law. Plaintiffs
appealed, but the appeal has been stayed pending a decision by the Wisconsin Supreme Court in
another case involving similar legal issues. On October 17, 2003, the Supreme Court of the State
of New York for New York County dismissed the consolidated New York state class action for failure
to state a claim upon which relief could be granted and denied the plaintiffs’ motion for class
certification. Plaintiffs have appealed that decision, with briefing scheduled to occur in summer
2005. 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 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.
We believe that our 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, we are vigorously
defending ourselves in these matters. We anticipate that these matters may take several years to
resolve, and although it is not possible to forecast the outcome of these matters, an adverse
judgment in any of the pending cases could adversely affect our consolidated financial statements.
Tamoxifen
To date approximately 31 consumer or third-party payer class action complaints have been filed
in state and federal courts against Zeneca, Inc., AstraZeneca Pharmaceuticals LP and Barr alleging,
among other things, that the 1993 settlement of patent litigation between Zeneca, Inc. and Barr
violated the antitrust laws, insulates Zeneca, Inc. and us from generic competition and enables
Zeneca, Inc. and Barr to charge artificially inflated prices for Tamoxifen citrate. A prior
investigation of this agreement by the U.S. Department of Justice was closed without further
action.
The Judicial Panel on Multidistrict Litigation has transferred these cases to the United
States District Court for the Eastern District of New York for pretrial proceedings. On May 19,
2003, the District Court entered judgment dismissing the cases for failure to state a viable
antitrust claim. Plaintiffs have filed an appeal, which is currently pending in the United States
Court of Appeals for the Second Circuit.
We believe that our agreement with Zeneca reflects a valid settlement to a patent suit and
cannot form the basis of an antitrust claim. Although it is not possible to forecast the outcome of
this matter, we intend to vigorously
30
defend ourselves. We anticipate that this matter may take several years to resolve, but an adverse
judgment could adversely affect our consolidated financial statements.
Hormone Therapy Litigation
We have been named as a defendant in approximately 3,100 personal injury product liability
cases brought against us 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 our subsidiary Duramed involve either or both of
our Cenestin product or the use of our 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
we have been named as defendants in these cases, fewer than a third of the complaints actually
allege the plaintiffs took a product manufactured by us, 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 June 30, 2005, nearly 1,500 of
the 3,100 cases had been dismissed and, based on discussions with our outside counsel, several
hundred more are expected to be dismissed in the near future.
We believe that we have viable defenses to the allegations in the complaints and are defending
our actions vigorously.
Medicaid Reimbursement Cases
We
have been named, along with numerous other pharmaceutical companies,
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, Cattaraugus, Cayuga, Chautauqua, Chenango, Erie, Fulton,
Genesee, Greene, Herkimer, Jefferson, Madison, Monroe, Nassau,
Niagara, Oneida, Onondaga, Putnam, Rensselaer, Rockland, Saratoga,
St. Lawrence, Steuben, Suffolk, Tompkins, Warren, Washington,
Wayne, Westchester, and Yates. In each of these matters, the
plaintiffs seek to recover damages and other relief for alleged
overcharges for prescription medications paid for or reimbursed by
their respective Medicaid programs. We believe that we have not
engaged in any improper conduct and are vigorously defending
ourselves.
The
Commonwealth of Massachusetts case and the New York cases, with the
exception of the action filed by Erie County, are currently pending
in the United States District Court for the District of
Massachusetts. Those actions are at an early stage with no trial
dates set. The Erie County case is currently stayed in the United
States District Court for the Western District of New York, and the
Judicial Panel on Multi-District Litigation has been asked to
transfer the action to the District of Massachusetts.
The
Alabama case was filed in Alabama state court, removed to the United
States District Court for the Middle District of Alabama, and
recently returned to state court with no trial date currently set.
The Illinois case was filed in Illinois state court and recently
removed to the United States District Court for the Northern District
of Illinois, with a pending motion to return the case to state court
and no trial date currently set. The Kentucky case was filed in
Kentucky state court and recently removed to the United States
District Court
for the Eastern District of Kentucky, with a pending motion to return
the case to state court and no trial date currently set.
Other
As of June 30, 2005, Barr Pharmaceuticals and its subsidiaries were involved in various other
disputes, governmental inquiries, investigations and proceedings, and litigation matters that arise
from time-to-time in the ordinary course of business, some of which may involved substantial
damages. The process of resolving matters through litigation or other means is inherently
uncertain and it is possible that the resolution of these matters will adversely affect our
consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters put to the vote of our shareholders during the quarter ended June 30,
2005.
31
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol “BRL.” The
following table sets forth the quarterly high and low share trading price information for the
periods indicated (as adjusted for the three-for-two stock split effected in the form of a 50%
stock dividend in March 2004):
| |
|
|
|
|
|
|
|
|
| |
|
High |
|
|
Low |
|
Fiscal year ended June 30, 2005: |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
42.80 |
|
|
$ |
32.01 |
|
Second quarter |
|
|
46.90 |
|
|
|
35.07 |
|
Third quarter |
|
|
50.45 |
|
|
|
43.71 |
|
Fourth quarter |
|
|
54.29 |
|
|
|
47.00 |
|
|
|
|
|
|
|
|
|
|
Fiscal year ended June 30, 2004: |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
50.33 |
|
|
$ |
38.83 |
|
Second quarter |
|
|
56.91 |
|
|
|
45.17 |
|
Third quarter |
|
|
53.99 |
|
|
|
45.70 |
|
Fourth quarter |
|
|
49.25 |
|
|
|
32.89 |
|
As of August 30, 2005, we estimate that there were approximately 1,567 holders of record of
our common stock. We believe that a significant number of investors in our common stock hold their
shares in street name. Therefore, the number of beneficial owners of our common stock is much
greater than the number of record holders of our common stock.
We have not paid any cash dividends on our common stock in the last two fiscal years and we do
not anticipate paying any cash dividends in the foreseeable future.
In
April 2005, holders of warrants to purchase an aggregate of
288,226 shares of our common
stock, at $9.54 per share, exercised the warrants in full. As a result, we issued to the investors
288,226 unregistered shares of our common stock and received proceeds of $2,749,676. The issuance
of the shares to the investors was based on the exemption from registration under Section 4(2) of
the Securities Act.
In March 2004, holders of warrants to purchase an aggregate of 3,375,000 shares of our common
stock, consisting of 1,687,500 shares at $13.93 per share and 1,687,500 shares at $16.89 per share,
exercised the warrants in full through a cashless exercise. As a result, we issued to the
investors 2,340,610 unregistered shares of our common stock. We did not receive any proceeds from
the issuance of the shares. The issuance of the shares to the investors was based on the exemption
from registration under Section 4(2) of the Securities Act.
32
Item 6. Selected Financial Data
The following data has been derived from our consolidated financial statements and should be
read in conjunction with those statements, which are included in Item 8 of this report, together
with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included in Item 7 of this report.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended June 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 (1) |
|
| |
|
(in thousands, except per share data) |
|
Statements of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,047,399 |
|
|
$ |
1,309,088 |
|
|
$ |
902,864 |
|
|
$ |
1,188,984 |
|
|
$ |
593,151 |
|
Earnings before income taxes |
|
|
329,876 |
|
|
|
194,440 |
|
|
|
262,715 |
|
|
|
337,537 |
|
|
|
101,793 |
|
Income tax expense |
|
|
114,888 |
|
|
|
71,337 |
|
|
|
95,149 |
|
|
|
125,318 |
|
|
|
38,714 |
|
Net earnings applicable to common shareholders |
|
|
214,988 |
|
|
|
123,103 |
|
|
|
167,566 |
|
|
|
210,269 |
|
|
|
62,566 |
|
Earnings per common share — basic |
|
|
2.08 |
|
|
|
1.21 |
|
|
|
1.69 |
(4) |
|
|
2.17 |
(4)(5) |
|
|
0.66 |
(4)(5) |
Earnings per common share — diluted |
|
|
2.03 |
|
|
|
1.15 |
|
|
|
1.62 |
(4) |
|
|
2.06 |
(4)(5) |
|
|
0.63 |
(4)(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
780,386 |
|
|
$ |
670,601 |
|
|
$ |
582,183 |
|
|
$ |
457,393 |
|
|
$ |
313,101 |
|
Total assets |
|
|
1,482,846 |
|
|
|
1,333,269 |
|
|
|
1,180,937 |
|
|
|
888,554 |
|
|
|
666,516 |
|
Long-term debt (2) |
|
|
15,493 |
|
|
|
32,355 |
|
|
|
34,027 |
|
|
|
42,634 |
|
|
|
65,563 |
|
Shareholders’ equity (3) |
|
|
1,233,970 |
|
|
|
1,042,046 |
|
|
|
867,995 |
|
|
|
666,532 |
|
|
|
416,777 |
|
|
|
|
| (1) |
|
Financial data presented for the fiscal year ended June 30, 2001 has been restated to include
the historical financial data of Duramed, which Barr acquired in October 2001. |
| |
| (2) |
|
Includes capital leases and excludes current installments. |
| |
| (3) |
|
The Company has not paid a cash dividend in any of the above years. |
| |
| (4) |
|
Amounts have been adjusted for the March 16, 2004 3-for-2 stock split effected in the form of
a 50% stock dividend (See Note 1 to the consolidated financial statements). |
| |
| (5) |
|
Amounts have been adjusted for the March 17, 2003 3-for-2 stock split effected in the form of
a 50% stock dividend (See Note 1 to the consolidated financial statements). |
33
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
We are a specialty pharmaceutical company that develops, markets and sells both generic and
proprietary (or branded) pharmaceutical products. We have a deep, diverse and profitable generic
product portfolio, and have diversified our operations by developing and acquiring several
proprietary products. Sales of generic products accounted for 73% of our product sales in fiscal
2005, while sales of our proprietary products grew from $57.7 million in fiscal 2003, accounting
for just 6% of our product sales that year, to $278.8 million in fiscal 2005, accounting for 27% of
product sales.
Generic Products
For many years, we have successfully utilized a strategy of developing the generic versions of
branded products that possess some combination of unique factors that we believe have the effect of
limiting competition for generics. Such factors include difficult formulation, complex and costly
manufacturing requirements or limited raw material availability. To date, our strategy has focused
on developing solid oral dosage forms of products. By targeting products with some combination of
these unique factors, we believe that our generic products will, in general, be less affected by
the intense and rapid pricing pressure often associated with more commodity-type generic products.
As a result of this focused strategy, we have been able to successfully identify, develop and
market generic products that generally have few competitors or that are able to enjoy longer
periods of limited competition and thus generate profit margins higher than those often associated
with commodity-type generic products. The development and launch of our generic oral contraceptive
products is an example of our generic development strategy. While we believe there are more tablet
and capsule products that may fit our “barrier-to-entry” criteria, we recognize that finding highly
profitable generic tablet and capsule products that will grow our generics business is difficult.
As a result, we have recently expanded our development resources to include non-tablet and capsule
products (such as patches, sterile ophthalmics and nasal sprays).
Challenging the patents covering certain brand products continues to be an important component
of our generic strategy. For many products, the patent provides the unique barrier that we seek to
identify in our product selection process. We try to be the first company to initiate a patent
challenge because in certain cases, we may be able to obtain 180 days of exclusivity for selling
the generic version of the product. For example, this occurred with fluoxetine, our generic
version of Eli Lilly’s Prozac®. If we do receive exclusivity for a product, we
typically experience significant revenues and profitability associated with that product for the
six-month exclusivity period, but at the end of that period experience significant decreases in our
revenues and market share associated with the product as other generic competitors enter the
market. This happened with our fluoxetine product after expiration of our generic exclusivity
period. Our record of successfully resolving patent challenges has contributed to our growth, but
has created periods of revenue and earnings volatility and will likely do so in the future. While
earnings and cash flow volatility may result from the launch of products subject to patent
challenges, we remain committed to this part of our business.
Macroeconomic factors also continue to favor the use of generic pharmaceutical products. The
aging population, rising health care costs and the vigilance of health care providers, insurance
companies and others to lower such costs have helped drive an increase in the substitution of
lower-cost generic products for higher-cost brand products. As evidence of this, the percentage of
overall prescriptions filled with generic products grew from 43% in 2000 to 53% by 2004, and is
predicted to continue to rise in the future.
Proprietary Products
To help diversify our existing revenue base and to provide for additional long-term
opportunities, we initiated a program more than five years ago to develop and market proprietary
pharmaceutical products. We formalized this program in 2001 by establishing Duramed Research.
Today we have a substantial number of employees dedicated to the development and marketing of our
proprietary products including approximately 300 sales representatives that promote directly to
physicians four of our products and two products related to the Co-Promotion Agreement with Kos
Pharmaceuticals. In addition, we sell but do not actively market seven other proprietary products.
34
Growth in proprietary product sales over the last three fiscal years has been accomplished
through product acquisitions and through higher sales of our first internally-developed proprietary
product, SEASONALEÒ.
Competition
One of our greatest challenges is continuing to stay ahead of the competition, both for
generic and proprietary products. Our successful generic product strategy has attracted new
competitors seeking to launch competing generic products as well as to be “first to file” for
potentially lucrative patent challenges. For example, other generic pharmaceutical companies have
recently started developing and marketing competing generic oral contraceptives in order to capture
some of our market share. In addition, there has been an increase in the number of competitors in
the generic industry that are based outside U.S., with several of such competitors based in India.
Many of these companies claim to have equivalent technological capabilities to U.S.-based generic
companies but at significant cost advantages over their U.S. counterparts.
Also, as a detriment to the value of the patent challenge strategy of Barr and other leading
generic manufacturers, brand pharmaceutical companies continue to partner with certain generic drug
companies to license a so-called “authorized generic” to the generic drug company. The use of
authorized generics by certain brand and generic companies undermines the value of the 180 day
exclusivity period enjoyed by the first company to file an ANDA containing a Paragraph IV
certification by providing another company with the ability to have the generic product on the
market at the same time.
Finally, as our proprietary pharmaceutical products grow, we anticipate that competing generic
pharmaceutical companies will challenge the patents protecting our branded products. For example,
one of our competitors, Watson, has filed a Paragraph IV certification challenging the patent on
SEASONALE.
To address these and other challenges, we continue to (1) invest aggressively in research and
development, (2) develop and launch new generic and proprietary products and (3) maintain an active
acquisition and licensing effort to complement our internal development activities.
Comparison of the fiscal years ended June 30, 2005 and June 30, 2004
The following table sets forth revenue data for the fiscal years ended June 30, 2005 and
2004 ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
|
| |
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
Generic products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed alternative brands(1) |
|
$ |
— |
|
|
$ |
385.3 |
|
|
|
(385.3 |
) |
|
|
-100 |
% |
Oral contraceptives |
|
|
396.6 |
|
|
|
403.9 |
|
|
|
(7.3 |
) |
|
|
-2 |
% |
Other generic(2) |
|
|
354.8 |
|
|
|
361.4 |
|
|
|
(6.6 |
) |
|
|
-2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total generic products |
|
|
751.4 |
|
|
|
1,150.6 |
|
|
|
(399.2 |
) |
|
|
-35 |
% |
Proprietary products |
|
|
278.8 |
|
|
|
146.1 |
|
|
|
132.7 |
|
|
|
91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales |
|
|
1,030.2 |
|
|
|
1,296.7 |
|
|
|
(266.5 |
) |
|
|
-21 |
% |
Alliance, development and other revenue |
|
|
17.2 |
|
|
|
12.4 |
|
|
|
4.8 |
|
|
|
39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,047.4 |
|
|
$ |
1,309.1 |
|
|
$ |
(261.7 |
) |
|
|
-20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (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. |
35
Revenues — Product Sales
Product sales for the year ended June 30, 2005 decreased as compared to the prior year
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 was a
significant increase 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 Ciproâ 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 2004. We have
shared and continued 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, we have included sales of Ciprofloxacin in the
“Other generic” line item in the table above. Such sales were not significant for fiscal 2005.
Oral Contraceptives
Sales of our generic oral contraceptive products decreased 2% in fiscal 2005 compared to
fiscal 2004. Price declines and lower volumes resulting from additional competitors reduced sales
on certain of our products, mainly Apri and Aviane, and a slowdown in the growth rate of generic
substitution more than offset (1) full year contributions from products launched during fiscal
2004, (2) two new products launched in fiscal 2005 and (3) market share gains on other existing
products.
Oral contraceptives are the most common method of reversible birth control, used by up to 82%
of women in the United States at some time during their reproductive years. Oral contraceptives
have a long history with widespread use attributed to many factors including efficacy in preventing
pregnancy, safety and simplicity in initiation and discontinuation, medical benefits and relatively
low incidence of side effects. From fiscal 2002 to fiscal 2004, sales of our generic oral
contraceptive products more than quadrupled. This growth was fueled by new product launches, the
addition of new customers and by increasing rates of generic substitution. We currently manufacture
and market 22 generic oral contraceptive products under trade names, two of which we launched
during the fiscal year ended June 30, 2005. This portfolio now represents nearly all oral
contraceptives that are eligible for generics. Additionally, the growth in generic substitution
rates for this heavily genericized portfolio of products slowed, even as we continued to gain
market share on certain products within the portfolio. We anticipate that these trends will
continue in fiscal 2006 as competitors launch new products and as the portfolio continues to
experience a slowing of overall growth in generic substitution. However, despite our expectation
that sales of our generic oral contraceptive portfolio will decline in fiscal 2006 versus fiscal
2005, we believe that we are well positioned to maintain market share for many of our products and
that our portfolio of oral contraceptives will continue to be a significant component of our
revenues in fiscal 2006.
Generic
Products — Other
Sales of other generic products decreased 2% in fiscal 2005 as compared to the prior year
period, as sales from new products launched since the end of last year, including Didanosine and
Metformin XR 750mg, were more than offset by declines in other existing product sales. The decline
in other existing product sales was primarily due to a significant decrease in sales of our
Dextroamphetamine group of products due to both declining volumes 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 experienced a significant decline in sales of Metformin XR 750mg
and would expect that decline to continue during fiscal 2006.
However, we expect that higher sales of Didanosine and sales from our generic version of
DDAVP, which we launched in July 2005, will more than offset these declines leading to higher sales
of our other generic products in
36
fiscal 2006.
Proprietary Products
Sales of our proprietary products almost doubled in fiscal 2005 as compared to the prior year.
This increase relates primarily to: (1) higher sales of Seasonale, which totaled $87.2 million for
the fiscal year, reflecting higher unit sales in support of prescription growth and higher pricing
compared to last year; (2) full year sales of Loestrin/Loestrin Fe and Plan B which we acquired in
February 2004 and March 2004, respectively; and (3) sales of Nordette and Prefest, which we
acquired in November 2004 and December 2004, respectively.
Seasonale prescriptions, according to IMS data, topped 800,000 for our fiscal year ended June
30, 2005, a 370% increase over prescriptions in the prior fiscal year. This increase is a direct
result of our significant marketing initiatives, including direct-to-consumer advertising and the
detailing efforts by our Women’s Healthcare Sales force. While we look for growth in fiscal 2006
for Seasonale prescriptions and sales, we expect much lower growth rates than those achieved in
fiscal 2005.
We have been active in acquiring proprietary products over the last two fiscal years and the
contribution from those products has increased our proprietary revenues substantially over that
period. Certain of the products which we have acquired no longer enjoy patent protection and are
experiencing declining prescription volumes. As a result, while these products are expected to
still generate healthy margins and predictable cash flows, we do not expect them to generate the
year-over-year sales growth we experienced in fiscal 2005. In fact, some may show year-over-year
decreases in sales. As a result, growth in our proprietary product sales in fiscal 2006 will be
mainly dependent on growth in Seasonale, Cenestin and Plan B, and the launch of our Enjuvia product
during the second half of fiscal 2006.
Cost of Sales
Our cost of sales includes the cost of products we purchase from third parties, our
manufacturing and packaging costs for products we manufacture, profit sharing or royalty payments
made to third parties, including raw material suppliers and any changes to our inventory reserve.
Amortization costs arising from the acquisition of product rights and our distribution costs 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 gross 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, for the two years ended June 30, 2005 and 2004 ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
|
| |
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
Generic products |
|
$ |
264.8 |
|
|
$ |
604.6 |
|
|
$ |
(339.8 |
) |
|
|
-56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
65 |
% |
|
|
47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary products |
|
$ |
39.3 |
|
|
$ |
28.1 |
|
|
$ |
11.2 |
|
|
|
40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
86 |
% |
|
|
81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
$ |
304.1 |
|
|
$ |
632.7 |
|
|
$ |
(328.6 |
) |
|
|
-52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
70 |
% |
|
|
51 |
% |
|
|
|
|
|
|
|
|
The decrease in total cost of sales, on a dollar basis, for the year ended June 30, 2005, as
compared to the prior year, was primarily due to the year-over-year decrease in sales of
Ciprofloxacin, which in the prior year we had purchased from Bayer.
37
Margins on our generic products increased significantly in fiscal 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 products.
Margins on our proprietary products increased in fiscal 2005 compared to fiscal 2004 due to
increased sales of higher margin products, primarily Seasonale and Loestrin/Loestrin Fe.
Selling, General and Administrative Expense
The following table sets forth selling, general and administrative expense data for the two
years ended June 30, 2005 and 2004 ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
|
| |
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
Selling, general and administrative |
|
$ |
298.9 |
|
|
$ |
314.5 |
|
|
$ |
(15.6 |
) |
|
|
-5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges included in general and administrative |
|
$ |
63.2 |
|
|
$ |
96.6 |
|
|
$ |
(33.4 |
) |
|
|
-35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower selling, general and administrative expenses in fiscal 2005 compared to last year were
primarily due to lower 2005 charges compared to 2004 charges partially offset by (1) $8.1 million
in higher marketing costs in fiscal 2005 associated with our proprietary product portfolio and (2) $7.1 million in
higher product intangible amortization expense in fiscal 2005 due to full year amortization on products purchased
in the prior year and amortization of products purchased in the current year.
Charges taken in the twelve months ended June 30, 2004 and 2005 are as follows:
Fiscal 2004:
| |
(1) |
|
A $16 million valuation allowance we established in September 2003 for our loans to
Natural Biologics, LLC, the raw material supplier for our generic equine-based conjugated
estrogens product, as the result of an unfavorable court decision rendered in September
2003; |
| |
| |
(2) |
|
The February 2004 write-off of $4.2 million associated with the acquisition of certain
emergency contraception assets from Gynetics, Inc; |
| |
| |
(3) |
|
An arbitration panel’s decision in June 2004 to award Solvay Pharmaceuticals, Inc. $68
million in damages on a claim that we improperly terminated an agreement with Solvay; and |
| |
| |
(4) |
|
An $8.5 million charge in June 2004 related to costs associated with our settlement of
the Estrostep and Femhrt patent challenge litigation against Galen. |
Fiscal 2005:
On June 15, 2005 we entered into a non-binding Letter of Intent (“LOI”) with Organon (Ireland)
Ltd., Organon USA and Savient Pharmaceuticals, Inc. to acquire the NDA for Mircette, obtain an
exclusive royalty free license to sell Mircette and Kariva in the United States and dismiss all
pending litigation between the parties in exchange for a payment by us of up to $155 million. The
parties will not be contractually bound unless and until they negotiate and execute definitive
agreements. If consummated, the transaction would permit us to promote Mircette through our
Duramed sales force, which could increase sales of both Mircette and Kariva. If the
transaction is not consummated, we expect to continue to vigorously defend our position in the
Mircette litigation.
In July 2005, the parties made the required filings with the Federal Trade Commission (“FTC”)
regarding the proposed transaction. On August 1, 2005, the FTC issued a “second request,” asking
the parties to provide detailed information concerning the proposed transaction.
38
The
proposed transaction is contingent upon both satisfactory completion
of the FTC’s Hart Scott Rodino review and the negotiation of mutually satisfactory definitive agreements. However, because the
proposed transaction includes, as one of its components, a payment in settlement of litigation, it
is presumed under GAAP to give rise to a “probable loss,” as defined in Statement of Financial
Accounting Standards No. 5, “Accounting for Contingencies”. In consultation with outside
advisors and based on preliminary valuations of the assets we would acquire if the transaction
closes on the terms presently contemplated, we have recorded a charge of $63.2 million as of June
30, 2005 to reflect the proposed litigation settlement. We may reverse the charge, in whole or in
part, in the future if the transaction does not close and we prevail in the litigation or are
ultimately held liable for a lesser amount of damages. If the transaction does not close and an
unfavorable verdict were to be rendered against us at trial, the ultimate amount of damages payable
by us could be significantly more or less than the $63.2 million charge we have recorded in
connection with the propose litigation settlement.
Research and Development
The following table sets forth research and development expenses for the two years ended June
30, 2005 and 2004 ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
|
| |
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
Research and development |
|
$ |
128.4 |
|
|
$ |
169.0 |
|
|
$ |
(40.6 |
) |
|
|
-24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges included in research and development |
|
$ |
— |
|
|
$ |
68.2 |
|
|
$ |
(68.2 |
) |
|
|
-100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended June 30, 2004 our total research and development costs reflected charges
relating to strategic acquisitions or similar activities including: (1) a write-off of $22 million
in March 2004 resulting from our agreement to acquire Schering’s rights and obligations under a
Product Development and License Agreement that had been capitalized at the time of our acquisition
of Enhance Pharmaceuticals, Inc. in June 2002; (2) a write-off of $10 million for in-process
research and development acquired in connection with our acquisition of Women’s Capital Corporation
in February 2004; and (3) a write-off of $36 million of in-process research and development costs
in connection with our purchase of substantially all of the assets of Endeavor Pharmaceuticals,
Inc. in November 2003.
The remaining $28 million increase in research and development for the year ended June 30,
2005 as compared to the prior year was primarily due to: (1) $9.1 million in higher third party
development costs, including 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”); (2) $9.4 million in higher bioequivalence study
costs, reflecting both an increase in the number and the cost of the studies; (3) $5.0 million in
higher internal production costs in support of internal development projects; and (4) $4.5 million
in higher headcount costs in support of the increased number of products in development.
Income Taxes
The following table sets forth income tax expense and the resulting effective tax rate stated
as a percentage of pre-tax income for the two years ended June 30, 2005 and 2004 ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
|
| |
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
Income tax expense |
|
$ |
114.9 |
|
|
$ |
71.3 |
|
|
$ |
43.6 |
|
|
|
61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
34.8 |
% |
|
|
36.7 |
% |
|
|
|
|
|
|
|
|
39
The effective tax rate for fiscal 2005 was favorably impacted by the completion of
several tax audits, the change of the mix in income between various taxing jurisdictions and the
enactment of favorable tax legislation in certain jurisdictions.
As indicated above, we have recently completed an audit by the IRS for our federal income tax
returns for fiscal years 2002 and 2003. The resolution favorably impacted our effective tax rate
for the fiscal year but did not have a material effect on our financial position or liquidity.
Periods prior to 2002 have either been audited or are no longer subject to audit. We are currently
being audited by the IRS for our fiscal year ended June 30, 2004.
Comparison of the fiscal years ended June 30, 2004 and June 30, 2003
The following table sets forth revenue data for the fiscal years ended June 30, 2004 and 2003
($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
|
| |
|
2004 |
|
|
2003 |
|
|
$ |
|
|
% |
|
Generic products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed alternative brands:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ciprofloxacin |
|
$ |
385.3 |
|
|
$ |
111.4 |
|
|
|
273.9 |
|
|
|
246 |
% |
Tamoxifen (2) |
|
|
— |
|
|
|
112.5 |
|
|
|
(112.5 |
) |
|
|
-100 |
% |
Oral contraceptives |
|
|
403.9 |
|
|
|
274.4 |
|
|
|
129.5 |
|
|
|
47 |
% |
Other generic (3) |
|
|
361.4 |
|
|
|
338.9 |
|
|
|
22.5 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total generic products |
|
|
1,150.6 |
|
|
|
837.2 |
|
|
|
313.4 |
|
|
|
37 |
% |
Proprietary products |
|
|
146.1 |
|
|
|
57.7 |
|
|
|
88.4 |
|
|
|
153 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales |
|
|
1,296.7 |
|
|
|
894.9 |
|
|
|
401.8 |
|
|
|
45 |
% |
Alliance, development and other revenue |
|
|
12.4 |
|
|
|
8.0 |
|
|
|
4.4 |
|
|
|
55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,309.1 |
|
|
$ |
902.9 |
|
|
$ |
406.2 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Distributed alternative brands are distributed by us under terms of agreements entered
into as part of patent challenge settlements. Therefore, for reporting purposes, they are
classified as Generic products. |
| |
| (2) |
|
Refects sales of Tamoxifen acquired from innovator. |
| |
| (3) |
|
Includes sales of Tamoxifen manufactured by Barr. |
Revenues — Product Sales
Product sales for the year ended June 30, 2004 increased as compared to the prior year
primarily due to the sales of our distributed version of Ciprofloxacin and to increased sales of
our generic and proprietary products, which more than offset the large decline in sales of our
distributed version of Tamoxifen.
Generic Products
Ciprofloxacin
On June 9, 2003, we began distributing Ciprofloxacin hydrochloride tablets and oral suspension
pursuant to a license from Bayer obtained under a 1997 settlement of a patent challenge we
initiated against Bayer’s Ciproâ antibiotic. In September 2003, we signed 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, Ciprofloxacin
was our largest selling product in fiscal 2004. We have shared one-half of our profits, as
defined,
40
from the sale of Ciprofloxacin with Aventis, the contractual successor to our partner in the
Cipro patent challenge case. Bayer’s period of pediatric exclusivity expired on June 9, 2004 and,
as we expected, several other competing Ciprofloxacin products were launched.
Tamoxifen
For most of the first six months of fiscal 2003 we sold a distributed version of Tamoxifen
that we purchased from AstraZeneca under the terms of a 1993 Supply and Distribution Agreement
entered into as part of a patent challenge settlement. This Agreement ended in December 2002. We
began selling our manufactured Tamoxifen product when AstraZeneca’s pediatric exclusivity for
Nolvadex ended on February 20, 2003. Therefore, we recorded no sales from a distributed version of
Tamoxifen in fiscal 2004.
Oral Contraceptives
Sales of our generic oral contraceptive products increased throughout fiscal 2004 and by June
2004, we became the largest supplier of oral contraceptives in the U.S. as determined by
prescription market share data provided by IMS America.
The revenue growth in fiscal 2004 was fueled by (1) increasing volumes resulting from growth
in market share by products launched in prior periods and (2) first year sales of new generic oral
contraceptives launched during fiscal 2004. The largest new product addition was Tri-Sprintec, our
generic equivalent to Ortho’s Tri-Cyclen oral contraceptive. We launched Tri-Sprintec in December
2003 in accordance with the terms of a patent challenge settlement we entered into with Ortho.
Generic
Products — Other
Sales of other generic products increased approximately 7% in fiscal 2004 as compared to the
prior year period, primarily due to sales of our Mirtazapine Orally Disintegrating Tablet, which we
launched in December 2003, and sales of ClaravisÒ, which we launched in May 2003.
These increases were partially offset by a significant decline in sales of our Dextro salt combo
product due to lower pricing and lower volumes resulting from the entry of two additional generic
competitors.
Proprietary Products
Sales of our proprietary products more than doubled in fiscal 2004 as compared to the prior
year. This increase relates primarily to: (1) sales from the four products we purchased from Wyeth
in June 2003; (2) the launch of SEASONALE; (3) increased
sales of Cenestin; and (4) sales of Loestrin/Loestrin Fe, which we purchased from Galen (Chemicals)
Limited (“Galen”) in March 2004.
In September 2003 we received approval for SEASONALE.
We began promoting SEASONALE directly to physicians in November 2003 and initiated our
direct-to-consumer television and print advertising program during our fourth quarter. Demand for
the product as measured by prescription data obtained from IMS America rose from 1,736 per week for
the week ended December 26, 2003 to 12,731 for the week ended July 30, 2004.
Sales of Cenestin increased at a higher than expected rate of 36% in fiscal 2004 compared to
fiscal 2003 primarily due to year-over-year price increases of approximately 24%, the launch of one
additional strength and customer buying patterns, which more than offset a 9% decline in Cenestin
prescriptions. Prescription declines began after the results of the Women’s Health Initiative
(“WHI”) study was published in July 2002 and continued through fiscal 2004. Since July 2002,
Cenestin prescriptions declined at a slower rate than those written for competing conjugated
estrogen products, thus allowing us to increase our market share to 6.8% as of June 30, 2004
compared to 5.6% as of June 30, 2003.
41
Cost of Sales
The following table sets forth cost of sales data in dollars as well as the resulting gross
margins, for the two years ended June 30, 2004 and 2003 ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
|
| |
|
2004 |
|
|
2003 |
|
|
$ |
|
|
% |
|
Generic products |
|
$ |
604.6 |
|
|
$ |
415.0 |
|
|
$ |
189.6 |
|
|
|
46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
47 |
% |
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary products |
|
$ |
28.1 |
|
|
$ |
9.1 |
|
|
$ |
19.0 |
|
|
|
209 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
81 |
% |
|
|
84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
$ |
632.7 |
|
|
$ |
424.1 |
|
|
$ |
208.6 |
|
|
|
49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
51 |
% |
|
|
53 |
% |
|
|
|
|
|
|
|
|
The increase in total cost of sales, on a dollar basis, for the year ended June 30, 2004, as
compared to the prior year was primarily due to increased product sales, principally relating to
Ciprofloxacin.
Margins on our generic products declined slightly in fiscal 2004 due mainly to the higher
percentage of Ciprofloxacin sales in fiscal 2004 compared to fiscal 2003. As a distributed product
that had a profit split paid to our partner, Ciprofloxacin had a higher cost of sales and a lower
margin than our other products.
Margins on our proprietary products declined in fiscal 2004 compared to fiscal 2003 as
increased sales of somewhat lower margin products, including the products acquired from Wyeth in
late fiscal 2003, more than offset higher sales of Cenestin and SEASONALE.
Selling, General and Administrative Expense
The following table sets forth selling, general and administrative expense data for the two
years ended June 30, 2004 and 2003 ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
| |
|
2004 |
|
2003 |
|
$ |
|
% |
Selling general and administrative
|
|
$ |
314.5 |
|
|
$ |
161.0 |
|
|
$ |
153.5 |
|
|
|
95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges included in general and administrative
|
|
$ |
96.6 |
|
|
$ |
20.0 |
|
|
$ |
76.6 |
|
|
|
383 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses for the year ended June 30, 2004 included charges
related to strategic acquisitions or other similar activities including: (1) a $16 million
valuation allowance we established in September 2003 for our loans to Natural Biologics, LLC, the
raw material supplier for our generic equine-based conjugated estrogens product, as the result of
an unfavorable court decision rendered in September 2003; (2) the February 2004 write-off of $4.2
million associated with the acquisition of certain emergency contraception assets from Gynetics,
Inc; (3) an arbitration panel’s decision in June 2004 to award Solvay Pharmaceuticals, Inc. $68
million in damages on a claim that we improperly terminated an agreement with Solvay; and (4) an
$8.5 million charge in June 2004 related to costs associated with our settlement of the Estrostep
and Femhrt patent challenge litigation against Galen. Included in the year ended June 30, 2003 was
a $20 million contingent attorney fee paid in connection with a litigation settlement with Wyeth.
The remaining increase in selling, general and administrative expenses for the year ended June
30, 2004 as compared to the prior year period was primarily due to: (1) increased marketing costs
for SEASONALE of $28
42
million; (2) higher costs of $12 million associated with the nearly doubling
of our women’s healthcare sales force; (3) $14 million in higher legal costs, primarily related to
patent matters, the Solvay arbitration and product liability matters; and (4) $8 million of increased information technology costs, including consulting
costs related to the initial phases of designing and implementing our new enterprise resource
planning system.
Research and Development
The following table sets forth research and development expenses for the two years ended June
30, 2004 and 2003 ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
| |
|
2004 |
|
2003 |
|
$ |
|
% |
Research and development
|
|
$ |
169.0 |
|
|
$ |
91.2 |
|
|
$ |
77.8 |
|
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges included in research and development
|
|
$ |
68.2 |
|
|
$ |
3.9 |
|
|
$ |
64.3 |
|
|
|
1649 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended June 30, 2004 our total research and development costs reflected charges
relating to strategic acquisitions or similar activities including: (1) a write-off of $22 million
in March 2004 resulting from our agreement to acquire Schering’s rights and obligations under a
Product Development and License Agreement that had been capitalized at the time of our acquisition
of Enhance Pharmaceuticals, Inc. in June 2002; (2) a write-off of $10 million for in-process
research and development acquired in connection with our acquisition of Women’s Capital Corporation
in February 2004; and (3) the write-off of $36 million of in-process research and development costs
in connection with our purchase of substantially all of the assets of Endeavor Pharmaceuticals,
Inc. in November 2003. Included in the year ended June 30, 2003 was a $3.9 million write-off of
in-process research and development associated with our June 2003 purchase from Wyeth of four
products and the product rights to an oral contraceptive in development.
The remaining increase in research and development for the year ended June 30, 2004 as
compared to the prior year was primarily due to: (1) $8 million in higher third party development
costs; (2) $4 million in higher headcount costs; and (3) $3 million higher raw material costs in
support of internal development projects.
Income Taxes
The following table sets forth income tax expense and the resulting effective tax rate stated
as a percentage of pre-tax income for the years ended June 30, 2004 and 2003 ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
| |
|
2004 |
|
2003 |
|
$ |
|
% |
Income tax expense
|
|
$ |
71.3 |
|
|
$ |
95.1 |
|
|
$ |
(23.8 |
) |
|
-25% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
36.7 |
% |
|
|
36.2 |
% |
|
|
|
|
|
|
The effective tax rate for fiscal 2004 was unfavorably impacted by the write-off of
in-process research and development costs associated with our February 2004 acquisition of Women’s
Capital Corporation, which was not deductible for federal and state income tax purposes.
Offsetting the unfavorable impact of the in-process research and development costs was a favorable
impact of a tax benefit of $3.7 million related to the completion of several tax audits and the
Internal Revenue Service’s approval of a change in our method of computing certain tax credits.
43
Liquidity and Capital Resources
Overview
The following table highlights selected measures of our liquidity and capital resources as of
June 30, 2005 and 2004 ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
|
| |
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
Cash & cash equivalents, short term marketable securities |
|
$ |
643.3 |
|
|
$ |
452.2 |
|
|
$ |
191.1 |
|
|
|
42 |
% |
Working capital |
|
|
780.4 |
|
|
|
670.6 |
|
|
|
109.8 |
|
|
|
16 |
% |
Cash flow from operations |
|
|
363.0 |
|
|
|
258.1 |
|
|
|
104.9 |
|
|
|
41 |
% |
Ratio of current assets to current liabilities |
|
|
4.7 : 1 |
|
|
|
4.2 : 1 |
|
|
|
|
|
|
|
|
|
Operating Activities
Our operating cash flows increased from $258 million in fiscal 2004 to $363 million in fiscal
2005. Our higher operating cash in fiscal 2005 was generated principally by our higher net
earnings adjusted for non-cash charges, including depreciation and amortization, which more than
offset increases in certain of our working capital components described below.
Our primary source of cash from operations is the collection of accounts and other receivables
related to product sales. Our primary uses of cash include financing inventory, research and
development programs, marketing and selling, capital projects, our share repurchase program and
investing in business development activities.
Our cash flows from operations have been more than sufficient to fund our operations, capital
expenditures and business development activities. As a result, our cash, cash equivalents and
short-term marketable securities balances have increased.
Investment in Marketable Securities
During fiscal 2005, we increased our investments in marketable securities to provide a greater
return on our cash balances. Our investments in marketable securities are governed by our
investment policy which seeks to optimize our returns while preserving our capital, maintaining
adequate liquidity and investing in tax advantaged securities, as appropriate.
44
Working Capital
Working capital as of June 30, 2005 and 2004 consisted of the following ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change |
| |
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
Cash, cash equivalents and marketable securities |
|
$ |
643.3 |
|
|
$ |
452.2 |
|
|
$ |
191.1 |
|
|
42 |
% |
Accounts receivable |
|
|
152.6 |
|
|
|
153.9 |
|
|
|
(1.3 |
) |
|
-1 |
% |
Inventories |
|
|
137.6 |
|
|
|
150.3 |
|
|
|
(12.7 |
) |
|
-8 |
% |
Prepaid & other current assets |
|
|
59.9 |
|
|
|
121.8 |
|
|
|
(61.9 |
) |
|
-51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
993.4 |
|
|
|
878.2 |
|
|
|
115.2 |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable & accrued liabilities |
|
|
194.2 |
|
|
|
179.1 |
|
|
|
15.1 |
|
|
8 |
% |
Income taxes payable |
|
|
13.4 |
|
|
|
20.1 |
|
|
|
(6.7 |
) |
|
-33 |
% |
Current portion of long-term debt & capital leases |
|
|
5.4 |
|
|
|
8.4 |
|
|
|
(3.0 |
) |
|
-36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
213.0 |
|
|
|
207.6 |
|
|
|
5.4 |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
780.4 |
|
|
$ |
670.6 |
|
|
$ |
109.8 |
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital increased in 2005 compared to 2004 primarily due to an increase in cash and
marketable securities resulting from our current period operations. Changes in certain other
components of working capital include: (1) a decrease in prepaid and other current assets primarily
due to a $47.5 million payment we received from Bayer in fiscal 2004 related to a price adjustment
for Ciprofloxacin inventory we purchased during the second half of fiscal 2004 and (2) an increase
in accounts payable and accrued liabilities largely as a result of the $63.2 million charge taken
in connection with the proposed litigation settlement regarding Mircette, partially offset by $48.0
million in payments made to Solvay Pharmaceuticals under an arbitration decision rendered against
us in fiscal 2004.
In fiscal 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 estimated a total cash tax
benefit of approximately $44 million from this exercise. We have realized a cash tax benefit of
approximately $28 million through June 30, 2005. A deferred tax asset of $16 million is expected to
reduce income taxes payable over the next 11 years.
Investing Activities
Our net cash used in investing activities was $177.0 million in 2005 compared to $267.3
million in 2004. This decrease was primarily due to a decrease in cash paid for acquisitions and a
reduction in the net cash used to purchase marketable securities.
Capital Expenditures
During the three fiscal years ended June 30, 2005, we have invested approximately $183 million
in upgrades and expansions to our property, plant and equipment as well as technology investments,
including the purchase and implementation of a new enterprise resource planning (“ERP”) system.
The investment in property, plant and equipment has significantly expanded our production,
laboratory, warehouse and distribution capacity in our facilities and was designed to help ensure
that we have the facilities necessary to manufacture, test, package and distribute our current and
future products. Our investment in the ERP system will ensure that we have a platform to grow our
business, including better integration of acquired businesses, expansion into new drug delivery
systems and the ability to expand internationally.
45
During the twelve months ended June 30, 2005, we invested $55 million in capital projects and
expect that our capital investments will be between $40 million and $60 million over the next
twelve months. Our estimate reflects
continued spending on our facility expansion programs and investments in information
technology projects including the final stages of the implementation of our new ERP system.
We believe we can continue funding our capital requirements using cash provided by operations.
However, we may issue long-term debt to finance a portion of our projects. We believe we have the
capital structure and cash flow to complete any such financing.
Strategic Transactions
Our investment in strategic product and company acquisitions was $46 million in fiscal 2005
and approximately $163 million for the three years ended June 30, 2005. In fiscal 2005, these
transactions included the buy-out of the royalty on Seasonale from Eastern Virginia Medical School,
and the acquisition of certain product rights from King Pharmaceuticals, Inc. We continuously
evaluate strategic transactions to further improve our business and long-range prospects and expect
to make additional investments or acquisitions over the next twelve months. We are unable to
predict the timing of potential transactions, though the cash required to complete them could equal
or exceed the average amounts invested over the past three years. These transactions typically
range from product development and license agreements to asset or corporate acquisitions.
Financing Activities
Net cash used in financing activities increased to $98.7 million in fiscal 2005 from net cash
provided by financing activities of $10.5 million in fiscal 2004 primarily due to funding share
repurchases under the our share repurchase program in fiscal 2005 and higher debt repayments in
fiscal 2005 as discussed below.
Share Repurchase Program
In August 2004, our Board of Directors authorized the repurchase of up to $300 million of our
common stock in open market or in privately negotiated transactions, pursuant to terms we deem
appropriate and at such times as we designate through the end of December 2005. We hold repurchased
shares as treasury shares and may use them for general corporate purposes, including but not
limited to acquisitions and for issuance upon exercise of outstanding stock options. During fiscal
2005, we repurchased approximately 2.6 million shares of our common stock for approximately $100
million.
Debt Repayments and Credit Availability
Debt balances decreased by approximately $20 million from June 30, 2004 to June 30, 2005
reflecting principal repayments. On August 30, 2004, we entered into a new $175 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 the $40 million credit facility we had in place at the
time.
In February 2005, we made a $12 million payment in complete satisfaction of mortgage notes
held by a bank. The notes were secured by our Cincinnati, Ohio manufacturing facility.
Scheduled principal repayments on existing debt will be $4 million during fiscal 2006.
Proceeds from Equity Transactions
Over the three years ending June 30, 2005, we received proceeds of approximately $71 million
from the exercise of warrants and employee stock options and share purchases under our employee
stock purchase plan. Whether we will continue to derive proceeds at a similar level in the future
is difficult to predict because the proceeds are highly
46
dependent upon our stock price, which can
be volatile, and the type of equity based compensation we may grant in future years.
Sufficiency of Cash Resources
We believe our current cash and cash equivalents, marketable securities, investment balances,
cash flows from operations and un-drawn amounts under our revolving credit facility are adequate to
fund our operations and planned capital expenditures and to capitalize on strategic opportunities
as they arise. We have and will continue to evaluate our capital structure as part of our goal to
promote long-term shareholder value. To the extent that additional capital resources are required,
we believe that such capital may be raised by additional bank borrowings or debt offerings or other
means.
Contractual Obligations
Payments
due by period for our contractual obligations at June 30, 2005
are as follows ($’s in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments due by period |
|
| |
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
4 to 5 |
|
|
|
|
| ($ in millions) |
|
Total |
|
|
Year |
|
|
1 to 3 Years |
|
|
Years |
|
|
Thereafter |
|
Long-term debt |
|
$ |
18.5 |
|
|
$ |
4.0 |
|
|
$ |
14.5 |
|
|
$ |
— |
|
|
$ |
— |
|
Capital leases |
|
|
2.9 |
|
|
|
1.7 |
|
|
|
1.2 |
|
|
|
— |
|
|
|
— |
|
Operating leases |
|
|
33.8 |
|
|
|
4.4 |
|
|
|
10.6 |
|
|
|
3.2 |
|
|
|
15.6 |
|
Purchase
obligations(1) |
|
|
85.2 |
|
|
|
84.4 |
|
|
|
0.8 |
|
|
|
— |
|
|
|
— |
|
Venture Funds commitment |
|
|
15.6 |
|
|
|
15.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Annual interest on fixed rate debt |
|
|
1.8 |
|
|
|
0.7 |
|
|
|
1.1 |
|
|
|
— |
|
|
|
— |
|
Other long-term liabilities |
|
|
21.0 |
|
|
|
21.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
178.8 |
|
|
$ |
131.8 |
|
|
$ |
28.2 |
|
|
$ |
3.2 |
|
|
$ |
15.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Purchase obligations consist mainly of commitments for raw materials used in our
manufacturing and research and development operations. |
In addition to the above, we have committed to make potential future “milestone” payments to
third parties as part of licensing and development programs. Payments under these agreements
generally become due and payable only upon the achievement of certain developmental, regulatory
and/or commercial milestones. Because it is uncertain if and when these milestones will be
achieved, such contingencies have not been recorded on our consolidated balance sheet.
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) income taxes; (4) contingencies; and
(5) accounting for acquisitions. 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.
47
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. 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 anticipate 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.”
We evaluate inventory levels at our wholesale customers, which account for approximately 50%
of our sales, through an internal analysis that considers, among other things, wholesaler
purchases, wholesaler contract sales, available end consumer prescription information and inventory
data from our largest wholesale customer. We believe that our evaluation of wholesaler inventory
levels as described in the preceding sentence, allows us to make reasonable estimates for our
applicable reserves. Further, our products are typically sold with sufficient dating to permit
sufficient time for our wholesaler customers to sell our products in their inventory through to the
end consumer.
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 activity of each reserve is set forth below (dollars in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Current provision |
|
|
Current provision |
|
|
Actual returns |
|
|
|
|
| |
|
|
|
|
|
related to sales |
|
|
related to sales |
|
|
or credits |
|
|
|
|
| |
|
Beginning |
|
|
made in the |
|
|
made in |
|
|
in the |
|
|
Ending |
|
| |
|
balance |
|
|
current period |
|
|
prior
periods |
|
|
current
period |
|
|
balance |
|
Fiscal year ended June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns and allowances |
|
$ |
57.5 |
|
|
$ |
64.8 |
|
|
$ |
1.0 |
|
|
$ |
(70.6 |
) |
|
$ |
52.7 |
|
Chargebacks |
|
|
38.8 |
|
|
|
267.6 |
|
|
|
6.0 |
|
|
|
(267.5 |
) |
|
|
44.9 |
|
Rebates |
|
|
39.4 |
|
|
|
200.6 |
|
|
|
— |
|
|
|
(194.7 |
) |
|
|
45.3 |
|
Cash discounts |
|
|
6.2 |
|
|
|
32.0 |
|
|
|
— |
|
|
|
(31.1 |
) |
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
141.9 |
|
|
$ |
565.0 |
|
|
$ |
7.0 |
|
|
$ |
(563.9 |
) |
|
$ |
150.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid rebates |
|
$ |
11.4 |
|
|
$ |
17.2 |
|
|
$ |
3.0 |
|
|
$ |
(21.5 |
) |
|
$ |
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended June 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns and allowances |
|
$ |
52.9 |
|
|
$ |
70.1 |
|
|
$ |
— |
|
|
$ |
(65.5 |
) |
|
$ |
57.5 |
|
Chargebacks |
|
|
30.0 |
|
|
|
189.8 |
|
|
|
— |
|
|
|
(181.0 |
) |
|
|
38.8 |
|
Rebates |
|
|
45.6 |
|
|
|
172.5 |
|
|
|
— |
|
|
|
(178.7 |
) |
|
|
39.4 |
|
Cash discounts |
|
|
7.6 |
|
|
|
35.2 |
|
|
|
— |
|
|
|
(36.6 |
) |
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
136.1 |
|
|
$ |
467.6 |
|
|
$ |
— |
|
|
$ |
(461.8 |
) |
|
$ |
141.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid rebates |
|
$ |
9.5 |
|
|
$ |
26.0 |
|
|
$ |
— |
|
|
$ |
(24.1 |
) |
|
$ |
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
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 customer 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:
| |
• |
|
the average historical chargeback credits; and |
| |
| |
• |
|
an estimate of the inventory held by our wholesalers, based on internal analysis of a
wholesaler’s historical purchases and contract sales. |
Rebates
– Our rebate programs can generally be categorized into the following four types:
| |
• |
|
direct rebates; |
| |
| |
• |
|
indirect rebates; |
| |
| |
• |
|
managed care rebates; and |
| |
| |
• |
|
Medicaid rebates. |
The direct and indirect rebates relate primarily to the generic segment of our business
whereas our managed care rebates are solely associated with the proprietary segment of our
business. Medicaid rebates apply to both of our segments. Direct rebates are generally rebates
paid to direct purchasing customers based on a percentage applied to a direct customer’s purchases
from us. Indirect rebates are rebates paid to “indirect customers” which have purchased Barr
products from a wholesaler under a contract with us. Managed care and Medicaid rebates are amounts
owed based upon contractual agreements or legal requirements with private sector and public sector
(Medicaid) benefit providers, after the final dispensing of the product by a pharmacy to a benefit
plan participant.
We maintain reserves for our direct rebate programs based on purchases by our direct
purchasing customers. Indirect rebate reserves are based on actual contract purchases in a period
and an estimate of wholesaler inventory subject to an indirect
rebate. Managed care and Medicaid
reserves are based on expected payments, which are
driven by patient usage, contract performance, as well as field inventory that will be subject
to a managed care or Medicaid rebate.
49
Prompt
Pay Discounts — We offer many of our customers 2% prompt pay discounts. We evaluate the
amounts accrued for prompt pay discounts by analyzing the unpaid invoices in our accounts
receivable aging subject to a prompt pay discount.
Alliance Revenue — We have agreements to co-promote products developed by other companies. Revenue
from the sale of the co-promoted product is recorded as alliance revenue and is included in net
revenue. Revenue is recognized when the co-promotion company ships the product and title and risk
of loss pass to a third party. Revenue is primarily based upon a percentage of the co-promotion
company’s net sales or gross margin. Our selling and marketing expenses related to alliance
revenue are included in selling, general and administrative expenses.
Inventory Reserves
Inventories are stated at the lower of cost or market and consist of finished goods purchased
from third party manufacturers and held for distribution, as well as raw materials, work-in-process
and finished goods manufactured by us. We determine cost on a first-in, first-out basis.
We capitalize the costs associated with certain products prior to receiving final marketing
approval from the FDA for such products (“pre-launch inventories”). For our generic products, each
ANDA submission is made with the expectation that: (i) the FDA will approve the marketing of the
applicable product, (ii) we will validate our process for manufacturing the applicable product
within the specifications that have been or will be approved by the FDA, and (iii) the cost of the
inventory will be recovered from the commercialization of our ANDA product. Typically, we
capitalize inventory related to our proprietary products based on the same expectations as above,
but we do not begin to capitalize costs until the NDA is filed or in the case of components to a
NDA product, the product development process has progressed to a point where we have determined
that the product has a high probability of regulatory approval. The accumulation of pre-launch
inventory involves risks such as (i) the FDA may not approve such product(s) for marketing on a
timely basis, if ever, (ii) approvals may require additional or different testing and/or
specifications than what was performed in the manufacture of such pre-launch inventory, and (iii)
in those instances where the pre-launch inventory is for a product that is subject to litigation,
the litigation may not be resolved or settled to our satisfaction. If any of these risks were to
materialize and the launch of such product were significantly delayed, we may have to write-off all
or a portion of such pre-launch inventory and such amounts could be material. As of June 30, 2005
and 2004, the amount of pre-launch inventory was not material to our net earnings.
We establish reserves for our inventory, including pre-launch inventory, to reflect situations
in which the cost of the inventory is not expected to be recovered. We review our inventory for
products that are close to or have reached their expiration date and therefore are not expected to
be sold, for products where market conditions have changed or are expected to change, and for
products that are not expected to be saleable based on our quality assurance and control standards.
In addition, for our pre-launch inventory, we take into consideration the substance of
communications with the FDA during the approval process and the views of patent and litigation
counsel. The reserves we establish in these situations is equal to all or a portion of the cost of
the inventory based on the specific facts and circumstances. In evaluating whether inventory is
properly stated at the lower of cost or market, we consider such factors as the amount of product
inventory on hand, estimated time required to sell such inventory, remaining shelf life and current
and expected market conditions, including levels of competition. We record provisions for
inventory reserves as part of cost of sales.
Inventories are presented net of reserves of $13 million at June 30, 2005 and $24 million at
June 30, 2004.
Income Taxes
Our effective tax rate is based on pre-tax income, statutory tax rates and available tax
incentives (i.e. credits) and planning opportunities in the various jurisdictions in which we
operate. We establish reserves when, despite our belief that the tax return positions are fully
supportable, certain positions may be challenged and may not be upheld on audit. We adjust our
reserves upon the occurrence of a discrete event, such as the completion of an income tax
audit. The effective tax rate includes the impact of reserve provisions and charges to
reserves that are considered appropriate. This rate is applied to our quarterly operating results.
50
Tax regulations require certain items to be included in the income tax return at different
times than the items are reflected in the financial statements. As a result, the effective tax rate
reflected in the financial statements is different than that reported in the income tax return.
Some of the differences are permanent, such as tax-exempt interest income, and some are timing
differences such as depreciation expense. Deferred tax assets generally represent items that can be
used as a tax deduction or credit in future years for which we have already recorded the tax
benefit in the financial statements. We establish valuation allowances for our deferred tax assets
when the amount of expected future taxable income is not likely to support the use of the deduction
or credit. Deferred tax liabilities generally represent tax expense recognized in the financial
statements for which payment has been deferred or expenses for which we have already taken a
deduction on the tax return, but have not yet recognized as expense in the financial statements.
Contingencies
We are involved in various patent, product liability, commercial litigation and claims,
government investigations and other legal proceedings that arise from time to time in the ordinary
course of our business. We assess, in consultation with counsel, the need to accrue a liability for
such contingencies and record a reserve when we determine that a loss related to a matter is both
probable and reasonably estimable. Because litigation and other contingencies are inherently
unpredictable, our assessment can involve judgments about future events. We record anticipated
recoveries under existing insurance contracts when collection is reasonably assured.
We utilize a combination of self-insurance and traditional third-party insurance policies to
cover potential product liability claims on products sold on or after September 30, 2002, and we
have obtained extended reporting periods under previous policies for claims arising on products
sold prior to September 30, 2002.
Acquisitions
We account for acquired businesses using the purchase method of accounting which requires that
the assets acquired and liabilities assumed be recorded at the date of acquisition at their
respective fair values. Our consolidated financial statements and results of operations reflect an
acquired business after the completion of the acquisition and are not restated. The cost to acquire
a business, including transaction costs, is allocated to the underlying net assets of the acquired
business in proportion to their respective fair values. Any excess of the purchase price over the
estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to
acquired in-process research and development are expensed at the date of acquisition. When we
acquire net assets that do not constitute a business, no goodwill is recognized.
The judgments made in determining the estimated fair value assigned to each class of assets
acquired and liabilities assumed, as well as asset lives, can materially impact our results of
operations. Accordingly, for significant items, we typically obtain assistance from third party
valuation specialists. Useful lives are determined based on the expected future period of benefit
of the asset, which considers various characteristics of the asset, including projected cash flows.
We review goodwill for impairment annually or more frequently if impairment indicators arise.
As a result of our acquisitions, we have recorded goodwill of $18 million on our balance
sheets as of June 30, 2005 and 2004. In addition, as a result of our acquisition of product rights
and related intangibles and certain product licenses, we have recorded $98 million and $65 million
as other intangible assets, net of accumulated amortization, on our balance sheets as of June 30,
2005 and 2004, respectively.
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 Cash
Flows.” 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
51
an alternative. We adopted 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, we
currently account for share-based payments to employees and directors using the intrinsic value
method and, as such, recognize no compensation cost for equity-based awards. Accordingly, the
adoption of SFAS No. 123(R)’s fair value method will have an impact on our results of operations,
although it will have no net impact on our overall financial position or cash flows.
We use the Black-Scholes formula to estimate the value of stock-based compensation granted to
employees and directors and expect to continue to use this acceptable option valuation model in the
future. 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 we 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 earnings and earnings per share.
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.
We will follow the modified prospective method, which requires us (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. Based on the adoption of the modified prospective method, we expect to record pre-tax
stock based compensation expense of approximately $27 million in fiscal 2006. This amount
represents awards granted in prior years which are vesting in fiscal 2006 and 2006 fiscal
year awards expected to be granted.
In November 2004, the FASB issued Statement No. 151, “Inventory Costs, an amendment of ARB No.
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 No. 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. We have evaluated the effect of adopting SFAS No. 151 and have determined
that this statement will not have a significant effect on our 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. We assessed the impact of adopting FSP FAS 109-1 on our consolidated
financial statements and expect to realize a slight reduction in our effective tax rate during
fiscal 2006. The Act will be effective for our fiscal year beginning July 1, 2005.
Environmental Matters
We may have obligations for environmental safety and clean-up under various state, local and
federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act,
commonly known as Superfund. Based on information currently available, environmental expenditures
have not had, and are not anticipated to have, any material effect on our consolidated financial
statements.
Effects of Inflation; Seasonality
Inflation has had only a minimal impact on our operations in recent years. Similarly, our
business is generally not affected by seasonality.
52
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, in no particular order:
| |
• |
|
the difficulty in predicting the timing and outcome of legal proceedings, including
patent-related matters such as patent challenge settlements and patent infringement cases; |
| |
| |
• |
|
the difficulty of predicting the timing of 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 pharmaceutical products; |
| |
| |
• |
|
our dependence on revenues from significant customers; |
| |
| |
• |
|
reimbursement policies of third party payors; |
| |
| |
• |
|
our dependence on revenues from significant products; |
| |
| |
• |
|
the use of estimates in the preparation of our financial statements; |
| |
| |
• |
|
the impact of competitive products and pricing on products, including the launch of
authorized generics; |
| |
| |
• |
|
the ability to launch new products in the timeframes we expect; |
| |
| |
• |
|
the availability of raw materials; |
| |
| |
• |
|
the availability of any product we purchase and sell as a distributor; |
| |
| |
• |
|
the regulatory environment; |
| |
| |
• |
|
our exposure to product liability and other lawsuits and contingencies; |
| |
| |
• |
|
the 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 our new enterprise resource planning
system; |
| |
| |
• |
|
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
specific factors that may be discussed with each forward-looking statement in this report or
disclosed 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.
53
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk for a change in interest rates relates primarily to our investment
portfolio of approximately $691.6 million. We do not use derivative financial instruments.
Our investment portfolio consists of cash and cash equivalents and market auction debt
securities primarily classified as “available for sale.” The primary objective of our investment
activities is to preserve principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we maintain our portfolio in a variety of high credit
quality debt securities, including U.S., state and local government and corporate obligations,
certificates of deposit and money market funds. Over 78% of our portfolio matures in less than
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 June 30, 2005 and the
value at maturity. Because our investments consist of cash equivalents and market auction debt
securities, a hypothetical 100 basis point change in interest rates is not likely to have a
material effect on our consolidated financial statements.
None of our outstanding debt at June 30, 2005 bears interest at a variable rate. Any
borrowings under our $175 million unsecured revolving credit facility will bear interest at a
variable rate based on the prime rate, the Federal Funds rate or LIBOR. At June 30, 2005, no
amounts were drawn under this facility.
Item 8. Financial Statements and Supplementary Data
Our financial statements are filed together with this Form 10-K. See the Index to Financial
Statements and Financial Statement Schedules on page F-1 for a list of the financial statements
filed together with this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chairman and Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such
controls and procedures, which, by their nature, can provide only reasonable assurance regarding
management’s control objectives.
At the conclusion of the period ended June 30, 2005, we carried out an evaluation, under the
supervision and with the participation of our management, including the Chairman and Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation, the Chairman and Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective in alerting them in a timely manner to information relating to Barr and its
consolidated subsidiaries required to be disclosed in this report.
Internal Control Over Financial Reporting
Management’s report on our internal control over financial reporting is included on page F-2
hereof. The report of our independent registered public accounting firm related to management’s
assessment of the effectiveness of internal control over financial reporting is included on page
F-3 hereof.
54
Changes in Internal Controls
During the last quarter of our fiscal year ended June 30, 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.
Item 9B. Other Information
None.
55
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain information regarding our directors and executive officers will be set forth in the
sections titled “Election of Directors”, “Executive Officers” and “Security Ownership of Certain
Beneficial Owners and Management – Section 16(a) Beneficial Ownership Reporting Compliance” in our
definitive Proxy Statement for our Annual Meeting of Stockholders scheduled for November 3, 2005 (
the “Proxy Statement”) and is incorporated herein by reference.
Code of Business Conduct and Ethics
We
have adopted a Code of Business Conduct and Ethics (the
“Code”) that applies to all Barr companies, their officers, directors and employees. This Code and the charters of the Audit,
Compensation, and Nominating and Corporate Governance committees are posted on the Our website at
www.barrlabs.com. We intend to post any amendments to or waivers from the Code on our website.
Item 11. Executive Compensation
A description of our executive officers’ compensation will be set forth in the sections titled
“Executive Compensation”, “Option Grants”, “Option Exercises and Option Values” and “Executive
Agreements” of the Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
A description of the security ownership of certain beneficial owners and management, as well
as equity compensation plan information, will be set forth in the sections titled “Ownership of
Securities” of the Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
A description of certain relationships and related transactions will be set forth in the
section titled “Certain Relationships and Related Transactions” of the Proxy Statement and is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
A description of the fees paid to our independent registered public accounting firm will be
set forth in the section titled “Independent Registered Public Accountants” of the Proxy Statement
and is incorporated herein by reference.
56
PART IV
Item 15. Exhibits and Financial Statement Schedules
| |
(a) |
|
Financial Statement Schedules: |
| |
| |
|
|
See the Index on page F-1 below. |
| |
| |
(b) |
|
Exhibits |
| |
2.1 |
|
Agreement and Plan of Merger, dated as of December 31, 2003 between Barr
Pharmaceuticals, Inc., a Delaware corporation, and Barr Laboratories,
Inc., a New York corporation (1) |
| |
| |
2.2 |
|
Asset Purchase Agreement dated November 20, 2003 between Endeavor
Pharmaceuticals, Inc. and Barr Laboratories, Inc. (2) |
| |
| |
2.3 |
|
Agreement and Plan of Merger, dated February 6, 2004, among Duramed
Pharmaceuticals, Inc., WCC Merger Sub, Inc. and Women’s Capital
Corporation (3) |
| |
| |
3.1 |
|
Amended and Restated Certificate of Incorporation of the Registrant (1) |
| |
| |
3.2 |
|
Restated By-Laws of the Registrant (1) |
| |
| |
4.1 |
|
The Registrant agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of any instrument defining the rights of
the holders of its long-term debt wherein the total amount of securities
authorized thereunder does not exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis. |
| |
| |
4.2 |
|
Note Purchase Agreement dated November 18, 1997 relating to $10 million of
Series A Senior Notes due November, 2004 and $20 million of Series B
Senior Notes due November, 2007 (4) |
| |
| |
10.1 |
|
Lease, dated February 6, 2003, between Mack-Cali Properties Co. No. 11
L.P. and Barr Laboratories, Inc. (5) |
| |
| |
10.2 |
|
Amended and Restated Employment Agreement with Bruce L. Downey, dated as
of October 24, 2002 (6) |
| |
| |
10.3 |
|
1993 Stock Incentive Plan (7) |
| |
| |
10.4 |
|
Non-Qualified Deferred Compensation Plan (2) |
| |
| |
10.5 |
|
1993 Employee Stock Purchase Plan (8) |
| |
| |
10.6 |
|
1993 Stock Option Plan for Non-Employee Directors (9) |
| |
| |
10.7 |
|
2002 Stock and Incentive Award Plan (10) |
| |
| |
10.8 |
|
2002 Stock Option Plan for Non-Employee Directors (10) |
| |
| |
10.9 |
|
Supply Agreement for Ciprofloxacin Hydrochloride dated January 8, 1997 (11) |
| |
| |
10.10 |
|
Proprietary Drug Development and Marketing Agreement, dated March 20,
2000, between Barr Laboratories, Inc. and DuPont Pharmaceuticals Company
(12) |
| |
| |
10.11 |
|
Description of Excess Savings and Retirement Plan (13) |
| |
| |
10.12 |
|
Amended and Restated Employment Agreement with Paul M. Bisaro, dated as of
October 24, 2002 (6) |
| |
| |
10.13 |
|
Amended and Restated Employment Agreement with Carole S. Ben-Maimon, dated
as of October 24, 2002 (6) |
| |
| |
10.14 |
|
Amended and Restated Employment Agreement with Timothy P. Catlett, dated
as of February 19, 2003 (14) |
57
| |
10.15 |
|
Amended and Restated Employment Agreement with William T. McKee, dated as
of February 19, 2003 (5) |
| |
| |
10.16 |
|
Amended and Restated Employment Agreement with Fredrick J. Killion, dated
as of February 19, 2003 (5) |
| |
| |
10.17 |
|
Amended and Restated Employment Agreement with Salah U. Ahmed, dated as of
February 19, 2003 (14) |
| |
| |
10.18 |
|
Amended and Restated Employment Agreement with Christine A. Mundkur, dated
as of February 19, 2003 (14) |
| |
| |
10.19 |
|
Amended and Restated Employment Agreement with Catherine F. Higgins, dated
as of February 19, 2003 (14) |
| |
| |
10.20 |
|
Employment Agreement with Michael J. Bogda, dated as of May 15, 2003 (14) |
| |
| |
10.21 |
|
Duramed 1988 Stock Option Plan (15) |
| |
| |
10.22 |
|
Duramed 1991 Stock Option Plan for Nonemployee Directors (16) |
| |
| |
10.23 |
|
Duramed 1997 Stock Option Plan (17) |
| |
| |
10.24 |
|
Duramed 2000 Stock Option Plan (18) |
| |
| |
10.25 |
|
Duramed 1999 Nonemployee Director Stock Plan (19) |
| |
| |
21.0 |
|
Subsidiaries of the Company |
| |
| |
23.1 |
|
Consent of Deloitte & Touche LLP |
| |
| |
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 |
|
|
|
| (1) |
|
Previously filed with the Securities and Exchange Commission on January 6, 2004 as an
Exhibit to the Registrant’s Current Report on Form 8-K and incorporated herein by
reference. |
| |
| (2) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 and
incorporated herein by reference. |
| |
| (3) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and
incorporated herein by reference. |
| |
| (4) |
|
Previously filed with the Securities and Exchange Commission as Exhibit 4-3 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 and
incorporated herein by reference. |
| |
| (5) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and
incorporated herein by reference. |
| |
| (6) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and
incorporated herein by reference. |
58
|
|
|
| (7) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Registration Statement on Form S-8 Nos. 33-73696 and 333-17349 and
incorporated herein by reference. |
| |
| (8) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Registration Statement on Form S-8 No. 33-73700 and incorporated herein by
reference. |
| |
| (9) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Registration Statement on Form S-8 Nos. 33-73698 and 333-17351 incorporated
herein by reference. |
| |
| (10) |
|
Previously filed with the Securities and Exchange Commission as an Appendix to the
Registrant’s Proxy Statement relating to the 2002 Annual Meeting of Stockholders and
incorporated herein by reference. |
| |
| (11) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and
incorporated herein by reference. |
| |
| (12) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and
incorporated herein by reference. |
| |
| (13) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Annual Report on Form 10-K for the year ended June 30, 2000 and incorporated
herein by reference. |
| |
| (14) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrant’s Annual Report on Form 10-K for the year ended June 30, 2003 and incorporated
herein by reference. |
| |
| (15) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1993 Annual Meeting of
Stockholders and incorporated herein by reference. |
| |
| (16) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1998 Annual Meeting of
Stockholders and incorporated herein by reference. |
| |
| (17) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1997 Annual Meeting of
Stockholders and incorporated herein by reference. |
| |
| (18) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 2000 Annual Meeting of
Stockholders and incorporated herein by reference. |
| |
| (19) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Duramed Pharmaceuticals, Inc. Annual Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference. |
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
|
|
|
|
|
|
|
By:
|
|
/s/ Bruce L. Downey |
|
|
|
|
|
|
|
|
|
Bruce L. Downey |
|
|
|
|
Chairman of the Board and |
|
|
|
|
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| /s/ Bruce L. Downey
Bruce L. Downey |
|
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
|
|
September 12, 2005 |
| /s/ William T. McKee
William T. McKee |
|
Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
September 12, 2005 |
| /s/
Carole S.Ben-Maimon
Carole S. Ben-Maimon |
|
Director
|
|
September 12, 2005 |
| /s/ Paul M. Bisaro
Paul M. Bisaro |
|
Director
|
|
September 12, 2005 |
| /s/ Harold N. Chefitz
Harold N. Chefitz |
|
Director
|
|
September 12, 2005 |
| /s/ Richard R.
Frankovic
Richard R. Frankovic |
|
Director
|
|
September 12, 2005 |
| /s/ James S. Gilmore
III
James S. Gilmore III |
|
Director
|
|
September 12, 2005 |
| /s/ Jack M. Kay
Jack M. Kay |
|
Director
|
|
September 12, 2005 |
| /s/ Peter R. Seaver
Peter R. Seaver |
|
Director
|
|
September 12, 2005 |
| /s/ George P. Stephan
George P. Stephan |
|
Director
|
|
September 12, 2005 |
60
PART II
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
| |
|
|
| |
|
Page |
|
|
F-2 |
|
|
F-3 |
|
|
F-5 |
|
|
F-6 |
|
|
F-7 |
|
|
F-8 |
|
|
F-9 |
|
|
S-1 |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over
financial reporting. We maintain internal control over financial reporting designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles in the United States of America.
Because of its inherent limitations, any system of internal control over financial reporting,
no matter how well designed, may not prevent or detect misstatements due to the possibility of
collusion or improper override of controls, or that misstatements due to error or fraud may occur
that are not detected. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of the Company’s internal control over
financial reporting as of June 30, 2005 using criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
This assessment included an evaluation of the design of the Company’s internal control over
financial reporting and testing of the operational effectiveness of its internal control over
financial reporting. Based on this assessment, management has concluded that the Company maintained
effective internal control over financial reporting as of June 30, 2005, based upon the COSO
framework criteria.
Management’s assessment of the effectiveness of the Company’s internal control over financial
reporting as of June 30, 2005 has been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report which appears herein.
September 9, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Barr Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Barr Pharmaceuticals, Inc. and
subsidiaries (the “Company”) as of June 30, 2005 and 2004, and the related consolidated statements
of operations, shareholders’ equity, and cash flows for each of the three years in the period ended
June 30, 2005. Our audits also included the financial statement schedule listed in the Index at
Item 15. We also have audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that the Company maintained effective internal
control over financial reporting as of June 30, 2005, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for these financial statements and financial
statement schedule, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule, an opinion on management’s assessment, and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audit of financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles and
that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of June 30, 2005 and 2004, and the
results of its operations and its cash flows for each of the three years in the period ended June
30, 2005, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein. Also, in our opinion, management’s assessment that
the Company maintained effective internal control over financial reporting as of June 30, 2005, is
fairly stated, in all material respects, based on the
F-3
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of June 30, 2005,
based on the criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
September 9, 2005
F-4
BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended June 30, |
|
| (in thousands, except share and per share data) |
|
2005 |
|
|
2004 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
115,793 |
|
|
$ |
28,508 |
|
Marketable securities |
|
|
527,462 |
|
|
|
423,746 |
|
Accounts receivable, net |
|
|
152,599 |
|
|
|
153,890 |
|
Other receivables |
|
|
21,411 |
|
|
|
60,848 |
|
Inventories, net |
|
|
137,638 |
|
|
|
150,252 |
|
Deferred income taxes |
|
|
30,224 |
|
|
|
46,077 |
|
Prepaid expenses and other current assets |
|
|
8,229 |
|
|
|
14,925 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
993,356 |
|
|
|
878,246 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
249,485 |
|
|
|
236,831 |
|
Deferred income taxes |
|
|
60,504 |
|
|
|
35,016 |
|
Marketable securities |
|
|
53,793 |
|
|
|
89,143 |
|
Other intangible assets |
|
|
98,343 |
|
|
|
64,897 |
|
Goodwill |
|
|
17,998 |
|
|
|
18,211 |
|
Other assets |
|
|
9,367 |
|
|
|
10,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,482,846 |
|
|
$ |
1,333,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
49,743 |
|
|
$ |
61,089 |
|
Accrued liabilities |
|
|
144,428 |
|
|
|
117,970 |
|
Current portion of long-term debt and capital lease obligations |
|
|
5,446 |
|
|
|
8,447 |
|
Income taxes payable |
|
|
13,353 |
|
|
|
20,139 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
212,970 |
|
|
|
207,645 |
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations |
|
|
15,493 |
|
|
|
32,355 |
|
Other liabilities |
|
|
20,413 |
|
|
|
51,223 |
|
|
|
|
|
|
|
|
|
|
Commitments & Contingencies (Note 17) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 106,340,470 and 104,916,103 in 2005 and 2004, respectively |
|
|
1,063 |
|
|
|
1,049 |
|
Additional paid-in capital |
|
|
454,489 |
|
|
|
377,024 |
|
Retained earnings |
|
|
879,669 |
|
|
|
664,681 |
|
Accumulated other comprehensive loss |
|
|
(561 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
1,334,660 |
|
|
|
1,042,754 |
|
Treasury
stock at cost: 2,972,997 and 420,597 shares in 2005 and 2004, respectively |
|
|
(100,690 |
) |
|
|
(708 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
1,233,970 |
|
|
|
1,042,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
1,482,846 |
|
|
$ |
1,333,269 |
|
|
|
|
|
|
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-5
BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended June 30, |
|
| (in thousands, except per share data) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
1,030,174 |
|
|
$ |
1,296,709 |
|
|
$ |
894,888 |
|
Alliance, development and other revenue |
|
|
17,225 |
|
|
|
12,379 |
|
|
|
7,976 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,047,399 |
|
|
|
1,309,088 |
|
|
|
902,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
304,080 |
|
|
|
632,745 |
|
|
|
424,099 |
|
Selling, general and administrative |
|
|
298,908 |
|
|
|
314,500 |
|
|
|
160,978 |
|
Research and development |
|
|
128,384 |
|
|
|
168,995 |
|
|
|
91,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
|
316,027 |
|
|
|
192,848 |
|
|
|
226,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from patent challenge settlement |
|
|
— |
|
|
|
— |
|
|
|
31,396 |
|
Interest income |
|
|
11,449 |
|
|
|
5,768 |
|
|
|
6,341 |
|
Interest expense |
|
|
1,463 |
|
|
|
2,643 |
|
|
|
1,474 |
|
Other income (expense) |
|
|
3,863 |
|
|
|
(1,533 |
) |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
329,876 |
|
|
|
194,440 |
|
|
|
262,715 |
|
Income tax expense |
|
|
114,888 |
|
|
|
71,337 |
|
|
|
95,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
214,988 |
|
|
$ |
123,103 |
|
|
$ |
167,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — basic |
|
$ |
2.08 |
|
|
$ |
1.21 |
|
|
$ |
1.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — diluted |
|
$ |
2.03 |
|
|
$ |
1.15 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
103,180 |
|
|
|
101,823 |
|
|
|
99,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — diluted |
|
|
106,052 |
|
|
|
106,661 |
|
|
|
103,592 |
|
|
|
|
|
|
|
|
|
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-6
BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands, except shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
Paid |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Total |
|
| |
|
Common Stock |
|
|
Paid |
|
|
in Capital - |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
Shareholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
in Capital |
|
|
Warrants |
|
|
Earnings |
|
|
Income / (Loss) |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
Balance, July 1, 2002 |
|
|
43,792,170 |
|
|
$ |
438 |
|
|
$ |
275,219 |
|
|
$ |
16,418 |
|
|
$ |
375,066 |
|
|
$ |
99 |
|
|
|
186,932 |
|
$ |
|
(708 |
) |
|
$ |
666,532 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,566 |
|
Unrealized loss on marketable
securities, net of tax of $170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(278 |
) |
|
|
|
|
|
|
|
|
|
|
(278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,288 |
|
Tax benefit of stock incentive plans |
|
|
|
|
|
|
|
|
|
|
10,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,912 |
|
Issuance of common stock for
exercised stock options and
employees’ stock purchase plans |
|
|
1,020,032 |
|
|
|
10 |
|
|
|
23,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,463 |
|
Issuance of common stock for
exercised warrants |
|
|
83,940 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
Stock split (3-for-2) |
|
|
22,170,054 |
|
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
(422 |
) |
|
|
|
|
|
|
93,466 |
|
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2003 |
|
|
67,066,196 |
|
|
|
671 |
|
|
|
309,583 |
|
|
|
16,418 |
|
|
|
542,210 |
|
|
|
(179 |
) |
|
|
280,398 |
|
|
|
(708 |
) |
|
|
867,995 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,103 |
|
Reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,282 |
|
Tax benefit of stock incentive plans
and warrants |
|
|
|
|
|
|
|
|
|
|
25,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,262 |
|
Issuance of common stock for
exercised stock options and
employees’ stock purchase plans |
|
|
1,456,808 |
|
|
|
14 |
|
|
|
25,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,798 |
|
Issuance of common stock for
exercised warrants |
|
|
2,340,610 |
|
|
|
23 |
|
|
|
16,395 |
|
|
|
(16,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Stock split (3-for-2) |
|
|
34,052,489 |
|
|
|
341 |
|
|
|
|
|
|
|
|
|
|
|
(632 |
) |
|
|
|
|
|
|
140,199 |
|
|
|
|
|
|
|
(291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2004 |
|
|
104,916,103 |
|
|
|
1,049 |
|
|
|
377,024 |
|
|
|
— |
|
|
|
664,681 |
|
|
|
— |
|
|
|
420,597 |
|
|
|
(708 |
) |
|
|
1,042,046 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,988 |
|
Unrealized loss on marketable
securities, net of tax of $320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(561 |
) |
|
|
|
|
|
|
|
|
|
|
(561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,427 |
|
Tax benefit of stock incentive plans
and warrants |
|
|
|
|
|
|
|
|
|
|
56,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,212 |
|
Issuance of common stock for
exercised stock options and
employees’ stock purchase plans |
|
|
1,136,141 |
|
|
|
11 |
|
|
|
18,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,517 |
|
Issuance of common stock for
exercised warrants |
|
|
288,226 |
|
|
|
3 |
|
|
|
2,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,750 |
|
Purchases of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,552,400 |
|
|
|
(99,982 |
) |
|
|
(99,982 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2005 |
|
|
106,340,470 |
|
|
$ |
1,063 |
|
|
$ |
454,489 |
|
|
$ |
— |
|
|
$ |
879,669 |
|
|
$ |
(561 |
) |
|
|
2,972,997 |
|
|
$ |
(100,690 |
) |
|
$ |
1,233,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-7
BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, |
|
| (in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
214,988 |
|
|
$ |
123,103 |
|
|
$ |
167,566 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
40,820 |
|
|
|
32,059 |
|
|
|
22,713 |
|
Deferred
income tax expense (benefit) |
|
|
7,100 |
|
|
|
(44,330 |
) |
|
|
6,684 |
|
Write-off of intangible asset |
|
|
— |
|
|
|
22,333 |
|
|
|
1,330 |
|
Provision for losses on loans to Natural Biologics |
|
|
1,050 |
|
|
|
16,079 |
|
|
|
— |
|
Other |
|
|
2,480 |
|
|
|
17,699 |
|
|
|
362 |
|
Tax benefit of stock incentive plans and warrants |
|
|
39,846 |
|
|
|
25,262 |
|
|
|
10,912 |
|
Write-off of in-process research and development associated with acquisitions |
|
|
— |
|
|
|
45,900 |
|
|
|
3,946 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other receivables, net |
|
|
40,728 |
|
|
|
38,081 |
|
|
|
(126,390 |
) |
Inventories, net |
|
|
12,614 |
|
|
|
13,771 |
|
|
|
(12,793 |
) |
Prepaid expenses |
|
|
6,396 |
|
|
|
(8,052 |
) |
|
|
923 |
|
Other assets |
|
|
6,668 |
|
|
|
(201 |
) |
|
|
(10,391 |
) |
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued liabilities and other
liabilities |
|
|
(2,881 |
) |
|
|
(32,428 |
) |
|
|
93,951 |
|
Income taxes payable |
|
|
(6,774 |
) |
|
|
8,823 |
|
|
|
1,515 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
363,035 |
|
|
|
258,099 |
|
|
|
160,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(55,157 |
) |
|
|
(46,907 |
) |
|
|
(80,617 |
) |
Acquisitions, net of cash acquired |
|
|
(46,500 |
) |
|
|
(90,563 |
) |
|
|
(25,992 |
) |
Purchases of marketable securities |
|
|
(1,220,869 |
) |
|
|
(1,126,043 |
) |
|
|
(492,675 |
) |
Sales of marketable securities |
|
|
1,152,485 |
|
|
|
1,001,130 |
|
|
|
349,190 |
|
Other |
|
|
(6,990 |
) |
|
|
(4,935 |
) |
|
|
(6,169 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(177,031 |
) |
|
|
(267,318 |
) |
|
|
(256,263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt and capital leases |
|
|
(20,004 |
) |
|
|
(8,522 |
) |
|
|
(5,528 |
) |
Principal payment on note assumed in acquisition |
|
|
— |
|
|
|
(6,500 |
) |
|
|
— |
|
Purchase of treasury stock |
|
|
(99,982 |
) |
|
|
— |
|
|
|
— |
|
Proceeds from exercise of stock options, employee stock purchases and warrants |
|
|
21,267 |
|
|
|
25,798 |
|
|
|
23,463 |
|
Other |
|
|
— |
|
|
|
(291 |
) |
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(98,719 |
) |
|
|
10,485 |
|
|
|
17,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
87,285 |
|
|
|
1,266 |
|
|
|
(78,200 |
) |
Cash and cash equivalents at beginning of period |
|
|
28,508 |
|
|
|
27,242 |
|
|
|
105,442 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
115,793 |
|
|
$ |
28,508 |
|
|
$ |
27,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of portion capitalized |
|
$ |
1,458 |
|
|
$ |
2,658 |
|
|
$ |
1,455 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
74,711 |
|
|
$ |
80,733 |
|
|
$ |
76,039 |
|
|
|
|
|
|
|
|
|
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FIANANCIAL STATEMENTS
F-8
BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share amounts)
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Other Matters
Barr Pharmaceuticals, Inc. is a Delaware holding company whose principal subsidiaries, Barr
Laboratories, Inc. and Duramed Pharmaceuticals, Inc., are engaged in the development, manufacture
and marketing of generic and proprietary pharmaceuticals.
Certain amounts in the 2003 and 2004 financial statements have been reclassified to conform
with the 2005 presentation.
On February 13, 2004 the Company’s Board of Directors declared a 3-for-2 stock split in the
form of a 50% stock dividend. Approximately 34.5 million shares of common stock were distributed on
March 16, 2004 to shareholders of record at the close of business on February 23, 2004. All
applicable prior period share and per share amounts have been adjusted for stock splits.
On November 20, 2003, the Company completed the purchase of substantially all of the assets of
Endeavor Pharmaceuticals, Inc. (“Endeavor”). The operating results of Endeavor are included in the
consolidated financial statements subsequent to the November 20, 2003 acquisition date. On February
25, 2004, the Company completed the purchase of 100% of the outstanding shares of Women’s Capital
Corporation (“WCC”). The operating results of WCC are included in the consolidated financial
statements subsequent to the February 25, 2004 acquisition date.
(b) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and use assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. These estimates are often based on judgments, probabilities and assumptions
that management believes are reasonable but that are inherently uncertain and unpredictable. As a
result, actual results could differ from those estimates. Management periodically evaluates
estimates used in the preparation of the consolidated financial statements for continued
reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based
on such periodic evaluations.
(c) Revenue Recognition
The Company recognizes product sales revenue when title and risk of loss have transferred to
the customer, when estimated provisions for product returns, rebates, including Medicaid rebates,
chargebacks and other sales allowances are reasonably determinable, and when collectibility is
reasonably assured. Accruals for these provisions are presented in the consolidated financial
statements as reductions to revenues. Accounts receivable are presented net of allowances relating
to the above provisions of $149,945 and $141,873 at June 30, 2005 and 2004, respectively. Included
in accrued liabilities are $10,060 and $11,413 relating to estimated Medicaid rebates at June 30,
2005 and 2004, respectively.
Alliance, development and other revenue includes: reimbursements relating to research and
development contracts, licensing fees, royalties earned under co-promotion agreements and profit
splits on certain products. The Company recognizes revenues under: (1) research and development
agreements as it performs the related research and development; (2) license fees over the life of
the product license; and (3) royalties under co-promotion agreements and profit splits at the time
its partner ships the product and title and risk of loss pass to a third party.
F-9
(d) Sales Returns and Allowances
At the time of sale, the Company simultaneously records estimates for various costs, which
reduce product sales. These costs include estimates for price adjustments, product returns,
chargebacks, rebates, including Medicaid rebates, prompt payment discounts and other sales
allowances. In addition, the Company records allowances for shelf-stock adjustments when the
conditions are appropriate. Estimates for sales allowances such as product returns, rebates and
chargebacks are based on a variety of factors including actual return experience of that product or
similar products, rebate arrangements for each product, and estimated sales by our wholesale
customers to other third parties who have contracts with the Company. Actual experience associated
with any of these items may be different than the Company’s estimates. The Company regularly
reviews the factors that influence its estimates and, if necessary, makes adjustments when it
believes that actual product returns, credits and other allowances may differ from established
reserves.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a first-in,
first-out (FIFO) basis. The Company establishes reserves for its inventory to reflect situations in
which the cost of the inventory is not expected to be recovered. In evaluating whether inventory is
stated at the lower of cost or market, management considers such factors as the amount of inventory
on hand, estimated time required to sell such inventory, remaining shelf life and current and
expected market conditions, including levels of competition. The Company records provisions for
inventory reserves as part of cost of sales.
(f) Income Taxes
Income taxes have been provided for using an asset and liability approach in which deferred
tax assets and liabilities are recognized for the differences between the financial statement and
tax basis of assets and liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided for the portion of deferred
tax assets that are “more-likely-than-not” to be unrealized. Deferred tax assets and liabilities
are measured using enacted tax rates and laws.
(g) Contingencies
The Company is involved in various patent, product liability and, commercial litigation and
claims, government investigations and other legal proceedings that arise from time to time in the
ordinary course of its business (see note 17). The Company assesses, in consultation with counsel,
the need to accrue a liability for such contingencies and record a reserve when it determines that
a loss related to a matter is both probable and reasonably estimable. Because litigation and other
contingencies are inherently unpredictable, the Company’s assessment can involve judgments about
future events. The Company records anticipated recoveries under existing insurance contracts when
collection is reasonably assured.
(h) Acquisitions
The Company accounts for acquired businesses using the purchase method of accounting which
requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at
their respective fair values. The Company’s consolidated financial statements and results of
operations reflect an acquired business after the completion of the acquisition and are not
restated. The cost to acquire a business, including transaction costs, is allocated to the
underlying net assets of the acquired business in proportion to their respective fair values. Any
excess of the purchase price over the estimated fair values of the net assets acquired is recorded
as goodwill. Amounts allocated to acquired in-process research and development are expensed at the date of
acquisition. When the Company acquires net assets that do not constitute a business, no goodwill is
recognized.
F-10
The judgments made in determining the estimated fair value assigned to each class of assets
acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s
results of operations. Accordingly, for significant items, the Company typically obtains assistance
from third party valuation specialists. Useful lives are determined based on the expected future
period of benefit of the asset, which considers various characteristics of the asset, including
projected cash flows. The Company reviews goodwill for impairment annually or more frequently if
impairment indicators arise.
(i) Credit and Market Risk
Financial instruments that potentially subject the Company to credit risk consist principally
of interest-bearing investments and trade receivables. The Company performs ongoing credit
evaluations of its customers’ financial condition and generally does not require collateral from
its customers.
(j) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments including money market
securities. In March 2005, the Company concluded that it was appropriate to reclassify its
investment in 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.
(k) Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is recorded on a straight-line
basis over the estimated useful lives of the related assets (3 to 10 years for machinery,
equipment, furniture and fixtures and 10 to 45 years for buildings and improvements). Amortization
of capital lease assets is included in depreciation expense. Leasehold improvements are amortized
on a straight-line basis over the shorter of their useful lives or the terms of the respective
leases, with such amortization periods generally ranging from 2 to 10 years. Maintenance and
repairs are charged to operations as incurred; renewals and betterments are capitalized.
(l) 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, which are described more fully in
Note 14. The Company accounts for these plans under the intrinsic value method described in
Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees,” and related
Interpretations. Under the intrinsic value method, no stock-based employee compensation cost is
reflected in net earnings. The following table illustrates the effect on net earnings and earnings
per share if the Company had applied the fair value recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation”, to stock-based compensation.
F-11
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, |
|
| (in thousands, expect per share data) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
NET EARNINGS, AS REPORTED |
|
$ |
214,988 |
|
|
$ |
123,103 |
|
|
$ |
167,566 |
|
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects |
|
|
20,178 |
|
|
|
13,747 |
|
|
|
6,047 |
|
|
|
|
|
|
|
|
|
|
|
PRO FORMA NET EARNINGS |
|
$ |
194,810 |
|
|
$ |
109,356 |
|
|
$ |
161,519 |
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic — as reported |
|
$ |
2.08 |
|
|
$ |
1.21 |
|
|
$ |
1.69 |
|
|
|
|
|
|
|
|
|
|
|
Basic — pro forma |
|
$ |
1.89 |
|
|
$ |
1.07 |
|
|
$ |
1.63 |
|
|
|
|
|
|
|
|
|
|
|
Diluted — as reported |
|
$ |
2.03 |
|
|
$ |
1.15 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
|
Diluted — pro forma |
|
$ |
1.84 |
|
|
$ |
1.03 |
|
|
$ |
1.56 |
|
|
|
|
|
|
|
|
|
|
|
For all plans, the fair value of each option grant was estimated at the date of grant using
the Black-Scholes Option Pricing Model with the following weighted-average assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Average expected term (years) |
|
|
3.3 |
|
|
|
3.5 |
|
|
|
3.7 |
|
Risk-free interest rate |
|
|
2.40 |
% |
|
|
2.20 |
% |
|
|
2.31 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Volatility |
|
|
48.22 |
% |
|
|
54.15 |
% |
|
|
53.73 |
% |
Fair value of each option granted at
market |
|
$ |
12.90 |
|
|
$ |
17.79 |
|
|
$ |
11.19 |
|
|
|
|
|
|
|
|
|
|
|
(m) Research and Development
Research and development costs are expensed as incurred. These expenses include the costs of
the Company’s research and development efforts, acquired in-process research and development, as
well as costs incurred in connection with the Company’s third party collaboration efforts.
Pre-approved milestone payments made under contract research and development arrangements prior to
regulatory approval are expensed when the milestone is achieved. Once the product receives
regulatory approval, the Company records any subsequent milestone payments as intangible assets.
(n) Advertising and Promotion Costs
Costs associated with advertising and promotion are expensed in the period in which the
advertising is used and these costs are included in selling, general and administrative expenses.
Advertising and promotion expenses totaled approximately $52,006, $45,637 and $21,377 for the years
ended June 30, 2005, 2004 and 2003, respectively.
F-12
(o) Earnings Per Share
The following is a reconciliation of the numerators and denominators used to calculate
earnings per common share (“EPS”) as presented in the consolidated statements of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands, except per share data) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Numerator
for basic and diluted earnings per share —
Net earnings |
|
$ |
214,988 |
|
|
$ |
123,103 |
|
|
$ |
167,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Net earnings |
|
$ |
214,988 |
|
|
$ |
123,103 |
|
|
$ |
167,566 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: Weighted average shares |
|
|
103,180 |
|
|
|
101,823 |
|
|
|
99,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — basic |
|
$ |
2.08 |
|
|
$ |
1.21 |
|
|
$ |
1.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Net earnings |
|
$ |
214,988 |
|
|
$ |
123,103 |
|
|
$ |
167,566 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: Weighted average shares — diluted |
|
|
106,052 |
|
|
|
106,661 |
|
|
|
103,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share — diluted |
|
$ |
2.03 |
|
|
$ |
1.15 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of weighted average
common shares — diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
103,180 |
|
|
|
101,823 |
|
|
|
99,125 |
|
Effect of dilutive options and warrants |
|
|
2,872 |
|
|
|
4,838 |
|
|
|
4,467 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — diluted |
|
|
106,052 |
|
|
|
106,661 |
|
|
|
103,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not included in the calculation of diluted earnings
per
share because |
|
|
|
|
|
|
|
|
|
|
|
|
their impact is antidilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding |
|
|
84 |
|
|
|
57 |
|
|
|
1,899 |
|
(p) Fair Value of Financial Instruments
Cash, Accounts Receivable, Other Receivables and Accounts Payable — The carrying amounts of
these items are a reasonable estimate of their fair value.
Marketable Securities — Marketable securities are recorded at their fair value (see Note 7).
Other Assets — Investments that do not have a readily determinable market value are recorded
at cost, as it is a reasonable estimate of fair value or current realizable value.
Long-Term Debt — The fair value at June 30, 2005 and 2004 is estimated at $18,000 and $38,000,
respectively (see Note 11 for carrying value). Estimates were determined by discounting the future
cash flows using rates currently available to the Company.
The fair value estimates presented herein are based on pertinent information available to
management as of June 30, 2005. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and current estimates of fair
value may differ significantly from the amounts presented herein.
(q) Asset Impairment
F-13
The Company reviews the carrying value of its long-term assets for impairment annually and
whenever events and circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its use and eventual
disposition. In cases where undiscounted expected future cash flows are less than the carrying
value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the
fair value of assets.
(r) New 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 Cash Flows.” 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 adopted SFAS No. 123(R) on July 1, 2005. This Statement 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 or cash flows.
Currently, the Company uses the Black-Scholes formula to estimate the value of stock-based
compensation granted to employees and directors and expects to continue to use this acceptable
option valuation model in the future. 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 pro forma net income and earnings per share
disclosed in Note 1(l) above.
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 will follow the modified prospective method, which requires companies to record
compensation expense for (1) the non-vested portion of previously issued awards that remain
outstanding at the initial date of adoption and (2) any awards issued or modified after July 1,
2005. Based on the adoption of the modified prospective method, the Company expects to record a
pre-tax stock based compensation expense of approximately $27 million in fiscal 2006. This amount
represents previously issued awards vesting in fiscal 2006 and 2006 fiscal year awards expected to
be granted.
In November 2004, the FASB issued Statement No. 151, “Inventory Costs, an amendment of ARB No. 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 No. 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 has evaluated the effect of
adopting SFAS No. 151 and has determined
that this statement will not have a significant effect 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 assessed the impact of adopting FSP
F-14
FAS 109-1 on its
consolidated financial statements and is expected to realize a slight reduction in its effective
tax rate during fiscal 2006. The Act will be effective for the Company’s fiscal year beginning July
1, 2005.
(2) Acquisitions
Acquisition of a Urinary Incontinence Product
In June 2002, the Company acquired certain assets and liabilities from Enhance Pharmaceuticals,
Inc. As part of the Enhance acquisition, the Company acquired a Product Development and License
Agreement with Schering AG pursuant to which Barr has been developing a vaginal ring urinary
incontinence product that Schering intended to market and distribute worldwide. On March 31, 2004,
Barr and Schering agreed that Barr would (i) acquire the worldwide rights to the product, (ii)
forgo all remaining expense reimbursements, development milestones and royalties, (iii) assume all
remaining responsibilities for the development and marketing of the product and (iv) pay Schering a
milestone payment upon product approval and a royalty on future product sales. As a result of this
agreement, the cash payments Barr expected to receive pursuant to the Product Development and
License Agreement terminated as of March 31, 2004. Accordingly, the Company wrote-off, as research
and development expense, the remaining $22,333 of net book value associated with the initial
intangible asset for the product license.
Acquisition of Products from Wyeth
In June 2003, the Company acquired from Wyeth product rights and a sublicense on a product in
development. The Company also entered into a supply agreement for royalty payments on future sales.
Upon acquisition, $3,946 was written off as research and development expense because technological
feasibility had not been established and the project had no alternative future use.
Acquisition of Endeavor Pharmaceuticals, Inc.
On November 20, 2003, the Company completed the acquisition of substantially all of the assets
of Endeavor Pharmaceuticals, Inc. (“Endeavor”). The Company acquired Endeavor to broaden its line
of hormone therapy and other female healthcare products. In the transaction, the Company acquired
the currently pending New Drug Applications and intellectual property related to Endeavor’s
Enjuvia™ synthetic conjugated estrogens product and two other female healthcare products in
early-stage development.
The total purchase price, including transaction costs of $517, was $35,600 and was allocated
to acquired in-process research and development. This amount was written-off upon acquisition as
research and development expense because the projects to develop the acquired products, which had
not received approval from the FDA, were incomplete and had no alternative future use.
The operating results of Endeavor are included in the Company’s consolidated financial
statements subsequent to the November 20, 2003 acquisition date.
Acquisition of Women’s Capital Corporation
In February 2004, the Company acquired 100% of the outstanding shares of Women’s Capital
Corporation (“WCC”), a privately held company that marketed the prescription version of Plan
B®, an emergency oral contraceptive product and had filed an application with the FDA
for an over-the-counter version of Plan B. The total purchase price, including acquisition costs of
$198 and net of cash acquired, was $12,273. In addition, at the time of the purchase, the Company
made a payment of $6,690, including principal and interest, to settle a note payable assumed from
WCC as part of the acquisition. The fair values of the assets acquired and liabilities assumed in
connection with the acquisition were:
F-15
| |
|
|
|
|
Current assets |
|
$ |
885 |
|
Deferred tax assets |
|
|
3,201 |
|
Intangible assets |
|
|
2,200 |
|
Goodwill |
|
|
4,610 |
|
In-process research and development |
|
|
10,300 |
|
|
|
|
|
Total assets acquired |
|
|
21,196 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
1,423 |
|
Debt |
|
|
7,500 |
|
|
|
|
|
Total liabilities assumed |
|
|
8,923 |
|
|
|
|
|
Net assets acquired |
|
$ |
12,273 |
|
|
|
|
|
|
|
|
|
|
Cash paid, net of cash acquired |
|
$ |
5,773 |
|
Note issued to WCC stockholders |
|
|
6,500 |
|
|
|
|
|
Purchase price |
|
$ |
12,273 |
|
|
|
|
|
An intangible asset of $2,200 representing the fair value of the currently marketed
prescription version of Plan B was amortized over one year. An acquired in-process research and
development asset in the amount of $10,300, representing the estimated fair value of the unapproved
over-the-counter version of Plan B, was written-off upon acquisition as research and development
expense because the project was incomplete and had no alternative future use. The difference
between the fair value of the net assets acquired and the purchase price resulted in goodwill of
$4,610. The goodwill and in-process research and development amounts are not deductible for tax
purposes.
The operating results of WCC are included in the Company’s consolidated financial statements
subsequent to the February 25, 2004 acquisition date. WCC’s results of operations prior to the
acquisition date were not significant in relation to the Company’s results of operations.
Acquisition of Certain Assets from Gynétics, Inc.
In February 2004, the Company paid $4,200 to purchase certain assets from Gynétics, Inc. that
were being used to develop, manufacture, distribute, promote, market, use and sell the emergency
oral contraceptive known as Preven® and all rights to an additional emergency oral
contraceptive product. The transaction also terminated the Company’s obligations under a
non-compete agreement between Barr and Gynétics that would have prevented the Company from
acquiring WCC. As part of the purchase, the Company agreed to pay Gynétics a royalty on Plan B
sales until royalty payments equal $2,500. The Company has consolidated its emergency contraception
business in the Plan B product. Accordingly, for the year ended June 30, 2004, the Company recorded
an expense for the $4,200 purchase price as selling, general and administrative expense.
Acquisition of Products from Galen (Chemicals) Limited
In March 2004, the Company acquired from Galen (Chemicals) Limited the exclusive rights to
manufacture and market Loestrin® products in the United States and Loestrin and
Minestrin® products in Canada for a $45,000 cash payment. These product rights are
recorded as other intangible assets on the consolidated balance sheets and are being amortized over
an estimated useful life of 10 years (see Note 8).
Acquisition of Product from Eastern Virginia Medical School
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
former patent holder for SEASONALE. This payment is recorded as other intangible assets on the
consolidated balance sheets and are being amortized over an estimated useful life of 15 years (see
Note 8).
F-16
Acquisition of Products from King Pharmaceuticals, Inc.
In November 2004 and December 2004, the Company acquired the exclusive rights in the United
States for Prefest® Tablets and Nordette® Tablets from King Pharmaceuticals, Inc. for $15,000 and
$12,000, respectively. These product rights are recorded as other intangible assets on the
consolidated balance sheets and are being amortized over an estimated useful life of 15 and 5
years, respectively (see Note 8).
(3) Proceeds From Patent Challenge
In January 1997, Bayer AG, Bayer Corporation (collectively, “Bayer”) and the Company agreed to
settle the then pending litigation regarding Bayer’s patent protecting Ciprofloxacin hydrochloride.
Under the settlement agreement, the Company withdrew its patent challenge by amending its
Abbreviated New Drug Application (“ANDA”) from a paragraph IV certification (claiming invalidity)
to a paragraph III certification (seeking approval upon patent expiry) and acknowledged the
validity and enforceability of the Ciprofloxacin patent. As consideration for this settlement, the
Company received a non-refundable payment of $24,550 in January 1997, which it recorded as proceeds
from patent challenge settlement. Concurrent with the Settlement Agreement, the Company also signed
a contingent, non-exclusive Supply Agreement (“Supply Agreement”) with Bayer that ended at patent
expiry in December 2003.
Under the terms of the Supply Agreement, until June 9, 2003, Bayer, at its sole option could
either (i) allow Barr and Aventis, the contractual successor to Barr’s joint venture partner in the
Cipro patent challenge case, to purchase, at a predetermined discount to Bayer’s then selling
price, quantities of Ciprofloxacin for resale under market conditions or (ii) make quarterly cash
payments as defined in the Agreement. Bayer elected to make payments rather than supply the Company
with Ciprofloxacin. Barr recognized the amounts due under the Supply Agreement as such amounts were
realized based on the outcome of Bayer’s election. The amounts realized are reported as proceeds
from patent challenge settlement. On June 9, 2003, the Company began distributing Ciprofloxacin
tablets.
(4) Other Receivables
Included in other receivables at June 30, 2004 was a $47,517 receivable from Bayer that was
collected during the quarter ended September 30, 2004.
(5) Inventories, net
The components of inventory are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
| |
|
2005 |
|
|
2004 |
|
Raw materials and supplies |
|
$ |
79,120 |
|
|
$ |
86,238 |
|
Work-in-process |
|
|
16,405 |
|
|
|
17,449 |
|
Finished goods |
|
|
42,113 |
|
|
|
46,565 |
|
|
|
|
|
|
|
|
|
|
$ |
137,638 |
|
|
$ |
150,252 |
|
|
|
|
|
|
|
|
F-17
(6) Property, plant and equipment, net
The major categories of the Company’s property, plant and equipment are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
| |
|
2005 |
|
|
2004 |
|
Land |
|
$ |
7,461 |
|
|
$ |
7,299 |
|
Buildings and improvements |
|
|
135,737 |
|
|
|
135,636 |
|
Machinery and equipment |
|
|
189,906 |
|
|
|
175,007 |
|
Leasehold improvements |
|
|
8,414 |
|
|
|
5,989 |
|
Construction in progress |
|
|
37,584 |
|
|
|
19,547 |
|
|
|
|
|
|
|
|
|
|
|
379,102 |
|
|
|
343,478 |
|
Less: accumulated depreciation and amortization |
|
|
129,617 |
|
|
|
106,647 |
|
|
|
|
|
|
|
|
|
|
$ |
249,485 |
|
|
$ |
236,831 |
|
|
|
|
|
|
|
|
Depreciation expense was $31,591, $25,678 and $19,547 for the years ended June 30, 2005, 2004
and 2003, respectively.
(7) Marketable Securities
The Company’s investments in marketable securities are primarily classified as “available for
sale” and, accordingly, are recorded at current market value with offsetting adjustments to
shareholders’ equity, net of income taxes. During fiscal 2005, the Company concluded that it was
appropriate to reclassify its investment in 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’s investment in auction rate securities is
classified as short or long-term based on the Company’s expected holding period.
The amortized cost and estimated market values of marketable securities at June 30, 2005 and
2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
| |
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Value |
|
June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
$ |
576,687 |
|
|
$ |
— |
|
|
$ |
(881 |
) |
|
$ |
575,806 |
|
Equity securities |
|
|
5,449 |
|
|
|
— |
|
|
|
— |
|
|
|
5,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
582,136 |
|
|
$ |
— |
|
|
$ |
(881 |
) |
|
$ |
581,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
$ |
509,213 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
509,213 |
|
Equity securities |
|
|
3,676 |
|
|
|
— |
|
|
|
— |
|
|
|
3,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
512,889 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
512,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost of investments sold is determined by the specific identification method.
Debt securities at June 30, 2005 with a market value of $575,806 include $474,194 in market
auction debt securities, which are readily convertible into cash at
par value with interest rate reset and underlying
maturity dates ranging from July 1, 2005 to December 1, 2037 and $101,612 in municipal bonds and
federal agency issues with maturity dates ranging from
September 28, 2005 to July 1, 2007.
Equity securities include amounts invested in connection with the Company’s excess 401(k) and
other deferred compensation plans.
F-18
(8) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following at June 30, 2005 and 2004:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
| |
|
2005 |
|
|
2004 |
|
Goodwill |
|
$ |
17,998 |
|
|
$ |
18,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses |
|
$ |
45,600 |
|
|
$ |
45,350 |
|
Product rights and related intangibles |
|
|
70,796 |
|
|
|
24,246 |
|
|
|
|
|
|
|
|
|
|
|
116,396 |
|
|
|
69,596 |
|
Less: accumulated amortization |
|
|
(18,053 |
) |
|
|
(4,699 |
) |
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
98,343 |
|
|
$ |
64,897 |
|
|
|
|
|
|
|
|
The entire goodwill balance at June 30, 2005 and 2004 is related to the Company’s proprietary
products segment. In fiscal 2004, the Company recorded $4,610 related to the acquisition of WCC and
subsequently reduced the amount for post-closing activity related to the transaction to a net
amount of $4,093. The $213 decrease in goodwill from June 30, 2004 is attributable to additional
post-closing activity related to the acquisition of WCC.
In fiscal 2005, 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 former patent holder for SEASONALE. This payment is included in product rights and related
intangibles (see Note 2).
In fiscal 2005, the Company acquired the exclusive rights in the United States for Prefest®
Tablets and Nordette® Tablets from King Pharmaceuticals, Inc. for $15,000 and $12,000,
respectively. These acquisition costs are included in product rights and related intangibles (see
Note 2).
The annual estimated amortization expense for the next five years on product licenses and
product rights and related intangibles is as follows:
| |
|
|
|
|
| Year Ending June 30, |
|
|
|
|
2006 |
|
$ |
12,760 |
|
2007 |
|
|
12,226 |
|
2008 |
|
|
11,745 |
|
2009 |
|
|
11,228 |
|
2010 |
|
|
9,889 |
|
The Company’s product licenses and product rights and related intangibles have weighted
average useful lives of approximately 10 and 11 years, respectively.
(9) 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.
F-19
(10) Solvay Arbitration Award
On March 31, 2002, the Company gave notice of its intention to terminate, as of June 30, 2002,
its relationship with Solvay Pharmaceuticals, Inc. which covered the joint promotion of the
Company’s Cenestin tablets and Solvay’s Prometrium® capsules. Solvay disputed the
Company’s right to terminate the relationship, claiming it was entitled to substantial damages and
initiated formal arbitration proceedings. The arbitration hearing was held in January 2004. On
June 17, 2004, the arbitration panel determined that the Company did not properly terminate its
contract with Solvay and awarded Solvay $68,000 in monetary damages to be paid over sixteen
months. The Company has included these amounts in selling, general and administrative expenses on
its statement of operations and in accrued and other liabilities on its balance sheet, as
applicable.
(11) Long-term Debt
A summary of long-term debt is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
| |
|
2005 |
|
|
2004 |
|
Senior Unsecured Notes (a) |
|
$ |
12,000 |
|
|
$ |
17,429 |
|
Mortgage notes (b) |
|
|
— |
|
|
|
13,200 |
|
Note Due to WCC Shareholders (c) |
|
|
6,500 |
|
|
|
6,500 |
|
|
|
|
|
|
|
|
|
|
|
18,500 |
|
|
|
37,129 |
|
Less: Current installments of long-term debt |
|
|
(4,000 |
) |
|
|
(7,029 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
14,500 |
|
|
$ |
30,100 |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
The Senior Unsecured Note consists of a $12,000, 7.01% Note due November 18, 2007. Annual
principal payments under the Note amount to $4,000 in each of fiscal years 2006, 2007 and
2008. |
| |
| |
|
The Senior Unsecured Note contains certain covenants including, among others, a restriction on
dividend payments in excess of $10,000 plus 75% of consolidated net earnings subsequent to June
30, 1997. |
| |
| (b) |
|
In February 2005, the Company made a $12,200 payment in complete satisfaction of its mortgage
note. |
| |
| (c) |
|
In February 2004, the Company acquired all of the outstanding shares of WCC. In connection
with that acquisition, a four-year $6,500 promissory note was issued to WCC. The note bears
interest at 2%. The entire principal amount and all accrued interest is payable on February
25, 2008 (see Note 2). |
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 June 30,
2005, there were no borrowings outstanding under this facility.
Principal maturities of existing long-term debt for the next five years and thereafter are as
follows:
| |
|
|
|
|
| Years Ending June 30, |
|
|
|
|
2006 |
|
$ |
4,000 |
|
2007 |
|
|
4,000 |
|
2008 |
|
|
10,500 |
|
2009 |
|
|
— |
|
2010 |
|
|
— |
|
F-20
(12) Related-party Transactions
Dr. Bernard C. Sherman and Jacob M. Kay
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. Dr.
Sherman was a member of the Company’s Board of Directors until October 24, 2002 and is the
principal stockholder of Sherman Delaware, Inc. which owned approximately 8.5% of the Company’s
outstanding common stock at June 30, 2005. 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.
The Company entered into an agreement with Apotex Inc. 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 Apotex
Inc.
The table below sets forth the statement of operations for transactions with companies owned
or controlled by Dr. Sherman.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Purchases from the Sherman Cos. |
|
$ |
5,575 |
|
|
$ |
2,808 |
|
|
$ |
3,583 |
|
|
|
|
|
|
|
|
|
|
|
Sales to the Sherman Cos. |
|
$ |
10,149 |
|
|
$ |
9,486 |
|
|
$ |
12,727 |
|
|
|
|
|
|
|
|
|
|
|
Recovery of shared litigation costs
included in operating expenses |
|
$ |
77 |
|
|
$ |
1,004 |
|
|
$ |
585 |
|
|
|
|
|
|
|
|
|
|
|
Profit split charged to cost of goods |
|
$ |
1,027 |
|
|
$ |
3,680 |
|
|
$ |
1,440 |
|
|
|
|
|
|
|
|
|
|
|
Royalty revenue |
|
$ |
216 |
|
|
$ |
295 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
(13) Income Taxes
A summary of the components of income tax expense is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
101,355 |
|
|
$ |
101,477 |
|
|
$ |
77,615 |
|
State |
|
|
6,482 |
|
|
|
18,097 |
|
|
|
10,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
107,837 |
|
|
$ |
119,574 |
|
|
$ |
88,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
4,441 |
|
|
$ |
(41,348 |
) |
|
$ |
9,010 |
|
State |
|
|
2,610 |
|
|
|
(6,889 |
) |
|
|
(2,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
7,051 |
|
|
|
(48,237 |
) |
|
|
6,623 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
114,888 |
|
|
$ |
71,337 |
|
|
$ |
95,149 |
|
|
|
|
|
|
|
|
|
|
|
F-21
The provision for income taxes differs from amounts computed by applying the statutory federal
income tax rate to earnings before income taxes due to the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Federal income taxes at statutory rate |
|
$ |
115,457 |
|
|
$ |
68,054 |
|
|
$ |
91,950 |
|
State income taxes, net of federal
income tax effect |
|
|
9,092 |
|
|
|
6,687 |
|
|
|
8,207 |
|
Tax credits |
|
|
(6,900 |
) |
|
|
(5,900 |
) |
|
|
(1,000 |
) |
Write-off of in-process research and
development |
|
|
— |
|
|
|
3,605 |
|
|
|
— |
|
Other, net |
|
|
(2,761 |
) |
|
|
(1,109 |
) |
|
|
(4,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
114,888 |
|
|
$ |
71,337 |
|
|
$ |
95,149 |
|
|
|
|
|
|
|
|
|
|
|
The temporary differences that give rise to deferred tax assets and liabilities as of June 30,
2005 and 2004 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, |
|
| |
|
2005 |
|
|
2004 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss |
|
$ |
3,677 |
|
|
$ |
5,113 |
|
Receivable reserves |
|
|
17,833 |
|
|
|
29,888 |
|
Inventory |
|
|
2,865 |
|
|
|
2,707 |
|
Warrants issued |
|
|
16,366 |
* |
|
|
— |
|
Capital loss carryforward |
|
|
2,864 |
|
|
|
3,122 |
|
Amortization of intangibles/goodwill |
|
|
60,467 |
|
|
|
28,673 |
|
Deferred revenue |
|
|
7,239 |
|
|
|
7,400 |
|
Natural Biologics loan |
|
|
— |
|
|
|
6,673 |
|
Tax credit carryforward |
|
|
— |
|
|
|
15 |
|
Investments |
|
|
320 |
* |
|
|
— |
|
Solvay litigation |
|
|
4,003 |
|
|
|
20,226 |
|
Other |
|
|
7,108 |
|
|
|
6,043 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
122,742 |
|
|
|
109,860 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Plant and equipment |
|
|
(24,905 |
) |
|
|
(19,889 |
) |
Other |
|
|
(3,452 |
) |
|
|
(4,196 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(28,357 |
) |
|
|
(24,085 |
) |
Less valuation allowance |
|
|
(3,657 |
) |
|
|
(4,682 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
90,728 |
|
|
$ |
81,093 |
|
|
|
|
|
|
|
|
|
|
|
| * |
|
changes reflected directly in equity |
At June 30, 2005 and 2004, as a result of certain acquisitions, the Company had
cumulative regular net operating loss carryforwards of approximately $3,568 and $10,195,
respectively, for federal and state income tax purposes, which will expire in the years 2018 to
2023. There is an annual limitation on the utilization of the net operating loss carryforward,
which is calculated under Internal Revenue Code Section 382.
The tax credit carryforward is primarily comprised of credits related to alternative minimum
tax payments, which have no expiration.
The Company has established a valuation allowance to reduce the deferred tax asset recorded
for certain tax credits, capital loss carryforwards, and certain net operating loss carryforwards.
A valuation allowance is recorded
F-22
because based on available evidence, it is more-likely-than-not
that a deferred tax asset will not be realized. The valuation allowance reduces the deferred tax
asset to the Company’s best estimate of the net deferred tax asset that, more-likely-than-not, will
be realized. The valuation allowance will be reduced when and if the Company determines that the
deferred income tax assets are likely to be realized. Accordingly, during the year ended June 30,
2005, the Company reduced the valuation allowance by a net of $1,018 due to the utilization of
certain tax capital losses and the write-off of certain deferred tax assets and related valuation
allowances.
| (14) |
|
Shareholders’ Equity
(Shares and Per Share amounts expressed in whole numbers) |
Employee Stock Option Plans
The Company has three employee stock option plans, the Barr Pharmaceuticals, Inc. 2002 Stock
and Incentive Award Plan (the “2002 Option Plan”), the Barr Pharmaceuticals, Inc. 1993 Stock
Incentive Plan (the “1993 Option Plan”) and the Barr Pharmaceuticals, Inc. 1986 Option Plan, which
were approved by the shareholders and which authorize the granting of options to officers and
employees to purchase the Company’s common stock. On February 20, 2003, all shares available for
grant in the 1993 Option Plan were transferred to the 2002 Option Plan and all subsequent grants
have been made under the 2002 Option Plan. Effective June 30, 1996, options were no longer granted
under the 1986 Option Plan. For fiscal 2005, 2004 and 2003, there were no options that expired
under this plan.
All options granted prior to June 30, 1996 under the 1993 Option Plan and 1986 Option Plan,
become exercisable between one and two years from the date of grant and expire ten years after the
date of grant except in cases of death or termination of employment as defined in each Plan. All
options outstanding on October 24, 2001 became fully vested upon completion of the Duramed merger.
Options granted after October 24, 2001 are exercisable between one and five years from the date of
grant. Through fiscal 2000, no option had been granted under either the 1993 Option Plan or the
1986 Option Plan at a price below the current market price of the Company’s common stock on the
date of grant. Options granted after February 20, 2003 become exercisable between one and three
years from the date of grant and expire ten years after the date of grant except in cases of death
or termination of employment.
In addition, the Company has options outstanding under the terms of various former Duramed
plans. These include the 1986 Stock Option Plan (the “Duramed 1986 Plan”), the 1988 Stock Option
Plan (the “1988 Plan”), the 1997 Stock Option Plan (the “1997 Plan”), and the 2000 Stock Option
Plan (the “2000 Plan”). All outstanding options under the Duramed plans, with the exception of
options held by certain senior executives of Duramed, vested as of October 24, 2001, the effective
date of the merger. Such options were assumed by Barr under the same terms and conditions as were
applicable under the Duramed stock option plans under which the options were granted. The number of
options and related exercise prices have been adjusted to a Barr equivalent number of options and
exercise price pursuant to the merger. Subsequent to October 24, 2001, additional options are no
longer granted under these Duramed plans.
F-23
A summary of the activity for the three fiscal years ended June 30, 2005, adjusted for the
March 2004 and 2003 3-for-2 stock splits, is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-Average |
|
| |
|
No. of Shares |
|
|
Exercise Price |
|
Outstanding at July 1, 2002 |
|
|
7,388,259 |
|
|
$ |
16.43 |
|
Granted |
|
|
2,109,333 |
|
|
|
26.74 |
|
Canceled |
|
|
(208,047 |
) |
|
|
27.92 |
|
Exercised |
|
|
(1,354,542 |
) |
|
|
12.57 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2003 |
|
|
7,935,003 |
|
|
|
19.51 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,779,545 |
|
|
|
43.01 |
|
Canceled |
|
|
(148,026 |
) |
|
|
28.74 |
|
Exercised |
|
|
(1,699,190 |
) |
|
|
11.82 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2004 |
|
|
7,867,332 |
|
|
|
26.26 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,419,300 |
|
|
|
35.41 |
|
Canceled |
|
|
(103,965 |
) |
|
|
37.60 |
|
Exercised |
|
|
(961,609 |
) |
|
|
15.46 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2005 |
|
|
8,221,058 |
|
|
$ |
28.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant (20,067,188
authorized) |
|
|
4,469,292 |
|
|
|
|
|
Exercisable at June 30, 2003 |
|
|
5,557,977 |
|
|
$ |
16.79 |
|
Exercisable at June 30, 2004 |
|
|
4,839,386 |
|
|
$ |
20.02 |
|
Exercisable at June 30, 2005 |
|
|
5,236,178 |
|
|
$ |
24.57 |
|
Available for grant and authorized amounts are for the 2002 Option Plan only, because as of
June 30, 2003 options are no longer granted under any of the other option plans discussed above.
Non-Employee Directors’ Stock Option Plans
During fiscal year 1994, the shareholders approved the Barr Pharmaceuticals, Inc. 1993 Stock
Option Plan for Non-Employee Directors (the “1993 Directors’ Plan”). All options granted under the
1993 Directors’ Plan have ten-year terms and are exercisable at an option exercise price equal to
the market price of the common stock on the date of grant. Each option is exercisable on the date
of the first annual shareholders’ meeting immediately following the date of grant of the option,
provided there has been no interruption of the optionee’s service on the Board before that date.
On October 24, 2002, the shareholders approved the Barr Pharmaceuticals, Inc. 2002 Stock
Option Plan for Non-Employee Directors (the “2002 Directors’ Plan”). This plan, among other things,
enhances the Company’s ability to attract and retain experienced directors. On February 20, 2003,
all shares available for grant under the 1993 Directors’ Plan were transferred to the 2002
Directors’ Plan.
F-24
A summary of the activity for the three fiscal years ended June 30, 2005, adjusted for the
March 2004 and 2003 3-for-2 stock splits is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-Average |
|
| |
|
No. of Shares |
|
|
Exercise Price |
|
Outstanding at July 1, 2002 |
|
|
1,102,044 |
|
|
$ |
14.77 |
|
Granted |
|
|
101,250 |
|
|
|
26.76 |
|
Canceled |
|
|
(59,270 |
) |
|
|
32.87 |
|
Exercised |
|
|
(464,061 |
) |
|
|
9.75 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2003 |
|
|
679,963 |
|
|
|
18.40 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
118,125 |
|
|
|
49.02 |
|
Canceled |
|
|
— |
|
|
|
— |
|
Exercised |
|
|
(154,499 |
) |
|
|
17.75 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2004 |
|
|
643,589 |
|
|
|
22.97 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
45,000 |
|
|
|
37.87 |
|
Canceled |
|
|
— |
|
|
|
— |
|
Exercised |
|
|
(58,568 |
) |
|
|
5.28 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2005 |
|
|
630,021 |
|
|
$ |
25.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Grant (2,798,438
authorized) |
|
|
906,469 |
|
|
|
|
|
Exercisable at June 30, 2003 |
|
|
578,714 |
|
|
$ |
16.94 |
|
Exercisable at June 30, 2004 |
|
|
576,089 |
|
|
$ |
19.92 |
|
Exercisable at June 30, 2005 |
|
|
585,021 |
|
|
$ |
24.74 |
|
Available for grant and authorized amounts are for the 2002 Directors’ Plan only, because as
of June 30, 2003, options are no longer granted under the 1993 Directors’ Plan and the 1991 Duramed
Directors’ Plan.
Employee Stock Purchase Plan
During fiscal 1994, the shareholders ratified the adoption by the Board of Directors of the
1993 Employee Stock Purchase Plan (the “Purchase Plan”) to offer employees an inducement to acquire
an ownership interest in the Company. The Purchase Plan permits eligible employees to purchase,
through regular payroll deductions, an aggregate of 1,518,750 shares of common stock at
approximately 85% of the fair market value of such shares. Under the Purchase Plan, 159,620, 81,708
and 115,704 shares of common stock were purchased during the years ended June 30, 2005, 2004 and
2003, respectively.
Warrants
During 1999, in conjunction with an amendment to a financing agreement, the Company granted to
a bank warrants to purchase 63,410 shares of the Company’s common stock at an exercise price of
$22.19. These warrants vested immediately. In December 1999, the financing agreement was amended to
reset the exercise price of 50% of the warrants to $15.62 per share. During 2000, based on an
antidilutive clause in the agreement, the number of warrants was adjusted to 66,340. The price of
33,426 warrants was adjusted to $21.05 and the remaining 32,918 warrants were repriced to $15.03.
In November 2001 and January 2002 a total of 57,294 of the warrants were exercised. As of June 30,
2005, warrants for 9,046 shares were outstanding and remain exercisable until July 2009.
On May 12, 2000, in combination with the issuance of Series G preferred stock, the Company
granted warrants to purchase 288,234 common shares at a price of $9.54 per share. The warrants
vested immediately. In April 2005 all 288,226 warrants were exercised.
F-25
In March 2000, the Company issued warrants granting DuPont the right to purchase 1,687,500
shares of Barr’s common stock at $13.93 per share, and 1,687,500 shares at $16.89 per share,
respectively. Each warrant was immediately exercisable. In March 2004, holders of these warrants
exercised the warrants through a cashless exercise which resulted in the issuance of 2,340,610
shares of our common stock.
The following table summarizes information about stock options and warrants outstanding at
June 30, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options and Warrants Outstanding |
|
|
Options and Warrants Exercisable |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
Number |
|
|
Remaining |
|
|
Average |
|
|
Number |
|
|
Average |
|
| |
|
Outstanding |
|
|
Contractual |
|
|
Exercise |
|
|
Exercisable |
|
|
Exercise |
|
| Range of Exercise Prices |
|
at June 30, 2005 |
|
|
Life |
|
|
Price |
|
|
at June 30, 2005 |
|
|
Price |
|
$3.06 - $24.57 |
|
|
2,593,015 |
|
|
|
3.48 |
|
|
$ |
13.39 |
|
|
|
2,593,015 |
|
|
$ |
13.39 |
|
$25.26 - $33.70 |
|
|
2,232,002 |
|
|
|
6.89 |
|
|
$ |
27.79 |
|
|
|
1,681,269 |
|
|
$ |
28.05 |
|
$33.91 - $37.87 |
|
|
2,253,615 |
|
|
|
7.90 |
|
|
$ |
35.57 |
|
|
|
907,265 |
|
|
$ |
36.26 |
|
$37.91 - $51.61 |
|
|
1,781,493 |
|
|
|
8.15 |
|
|
$ |
43.50 |
|
|
|
648,696 |
|
|
$ |
43.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,860,125 |
|
|
|
6.40 |
|
|
$ |
28.72 |
|
|
|
5,830,245 |
|
|
$ |
24.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15) Savings and Retirement
The Company has a savings and retirement plan (the “401(k) Plan”) which is intended to qualify
under Section 401(k) of the Internal Revenue Code. Employees are eligible to participate in the
401(k) Plan in the first month following the month of hire. Participating employees may contribute
up to a maximum of 60% of their earnings before or after taxes, limited to a maximum of $14 for
pre-tax contributions. The Company is required, pursuant to the terms of its collective bargaining
agreement, to contribute to each union employee’s account an amount equal to the 2% minimum
contribution made by such employee. The Company may, at its discretion, make cash contributions
equal to a percentage of the amount contributed by an employee to the 401(k) Plan up to a maximum
of 10% of such employee’s compensation. Participants are always fully vested with respect to their
own contributions and any profits arising therefrom. Participants become fully vested in the
Company’s contributions and related earnings after five full years of employment.
The Company’s contributions to the 401(k) Plans were $7,650, $6,534 and $5,549 for the years
ended June 30, 2005, 2004 and 2003, respectively.
The Company has a non-qualified plan (“Excess Plan”) that enables certain executives to defer
up to 60% of their compensation in excess of the qualified plan. The Company may, at its
discretion, contribute a percentage of the amount contributed by the individuals covered under this
Excess Plan to a maximum of 10% of such individual’s compensation. In fiscal years 2005, 2004 and
2003, the Company chose to make contributions at the 10% rate to this plan. As of June 30, 2005 and
2004, the Company had an asset and matching liability for the Excess Plan of $5,141 and $3,563,
respectively.
The Company has an unfunded pension plan covering two non-employee directors of Duramed who
were elected prior to 1998 and who had served on Duramed’s Board for at least five years. At the
time of the merger with Barr, two Duramed directors were eligible to receive benefits. The plan
provides an annual benefit, payable monthly over each director’s life, from the time a
participating director ceased to be a member of the Board, equal to 85% and
60%, respectively, of the director’s most recent annual Board fee, as adjusted annually to
reflect changes in the Consumer Price Index. As of June 30, 2005 and 2004, the Company has recorded
$447 and $466, respectively, as a long-term liability representing the present value of the
estimated future benefit obligation to the eligible directors. The right of a director to receive
benefits under the plan is forfeited if the director engages in any activity determined by the
Board to be contrary to the best interests of the Company.
F-26
In October 2003, the Board of Directors approved the Barr Pharmaceuticals, Inc. Non-Qualified
Deferred Compensation Plan (the “Plan”) that was adopted effective November 1, 2003. The Plan
provides for certain executives to defer all or a portion of their salary or bonus for a particular
calendar year. In addition, the Company will make a matching contribution subject to certain
limitations as defined in the Plan. The matching contribution as well as the employee deferral are
invested in the Plan as directed by the participant, and are payable on the terms and subject to
the conditions provided in the Plan. As of June 30, 2005 and 2004, the Company had an asset and
matching liability for the Plan of $308 and $114, respectively.
(16) Other Income (Expense), Net
A summary of other income (expense), net is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended June 30, |
|
| |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Proceeds from insurance settlement |
|
$ |
4,600 |
|
|
$ |
— |
|
|
$ |
— |
|
Loss on limited partnerships |
|
|
(796 |
) |
|
|
(1,346 |
) |
|
|
— |
|
Other |
|
|
59 |
|
|
|
(187 |
) |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
$ |
3,863 |
|
|
$ |
(1,533 |
) |
|
$ |
(128 |
) |
|
|
|
|
|
|
|
|
|
|
(17) Commitments and Contingencies
Leases
The Company is party to various leases, which relate to the rental of office facilities and
equipment. The Company believes it will be able to extend such leases, if necessary. The table
below shows the future minimum rental payments, exclusive of taxes, insurance and other costs under
noncancellable long-term lease commitments at June 30, 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended June 30, |
|
| |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
Operating leases |
|
$ |
4,359 |
|
|
$ |
3,981 |
|
|
$ |
3,379 |
|
|
$ |
3,281 |
|
|
$ |
3,189 |
|
|
$ |
15,586 |
|
Capital leases |
|
|
1,692 |
|
|
|
856 |
|
|
|
204 |
|
|
|
95 |
|
|
|
32 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum lease
payments |
|
$ |
6,051 |
|
|
$ |
4,837 |
|
|
$ |
3,583 |
|
|
$ |
3,376 |
|
|
$ |
3,221 |
|
|
$ |
15,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Venture Funds
During the second quarter of fiscal 2004, the Company made investments, as a limited partner,
in two separate venture capital funds as part of its continuing efforts to identify new products,
new technologies and new licensing opportunities. The Company has committed up to a total of
$15,000 for each of these funds over a five and 10-year period, as defined by each fund. As of
June 30, 2005 and June 30, 2004, the Company had invested $5,941 and $3,500, respectively, in these
funds. The Company accounts for these investments using the equity method of accounting.
Employment Agreements
The Company has entered into employment agreements with certain key employees. The current
terms of these agreements expire at various dates through 2007, subject to certain renewal
provisions.
F-27
Product Liability 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 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 its financial statements in a particular
period.
The Company uses a combination of self-insurance and traditional third-party insurance
policies to cover product liability claims. On September 30, 2004, the Company elected to
terminate a “finite-risk” insurance arrangement that it had in place for two years, and in
connection with such termination increased its traditional third-party product liability coverage,
as discussed below.
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 the first $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.
The Company has been incurring significant legal costs associated with its hormone therapy
litigation (see below). To date, these costs have been covered under extended reporting period
policies that provide up to $25,000 of coverage. As of June 30, 2005, there was approximately
$13,000 of coverage remaining under these policies. The Company has recorded a receivable for
legal costs incurred and expected to be recovered under these policies. Once the coverage from
these extended reporting period policies has been exhausted, future legal and settlement costs
will be covered by a combination of self-insurance and other third-party insurance layers.
Indemnity Provisions
From time-to-time, in the normal course of business, the Company agrees to indemnify its
suppliers, customers and employees concerning product liability and other matters. For certain
product liability matters, the Company has incurred legal defense costs on behalf of certain of its
customers under these agreements. No amounts have been recorded in the financial statements for
probable losses with respect to the Company’s obligations under such agreements.
In September 2001, Barr filed an ANDA for the generic version of Aventis’ Allegra® tablets.
Aventis has filed a lawsuit against Barr claiming patent infringement. A trial date for the patent
litigation has not been scheduled, but trial is expected in early 2006. In June 2005, the Company
entered into an agreement with Teva Pharmaceuticals USA, Inc. which allows Teva to manufacture and
launch Teva’s generic version of Aventis’ Allegra® product during the Company’s 180 day exclusivity
period, in exchange for Teva’s obligation to pay the Company a specified percentage of Teva’s
operating profit, as defined, earned on sales of the product. The Company intends to recognize the
amounts it earns under this arrangement at the time Teva ships product to its customers and will
classify such amounts on the “Alliance, development and other” revenue line of the statement of
operations. The agreement also provides that each company will indemnify the other for a portion of
any patent infringement damages they might incur, so that the parties will share any such damage
liability in proportion to their respective shares of Teva’s net profits.
On September 1, 2005, Teva launched its generic version of Allegra. At September 30, 2005,
the Company, in accordance with FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure
Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others” may be required to record a liability
to reflect the fair value of the indemnification obligation it has undertaken. Because the
Company continues to believe that it and
F-28
Teva have meritorious defenses in the litigation, the
Company expects this liability to be significantly smaller than the income it expects to earn from
the arrangement with Teva.
Litigation Settlement
On October 22, 1999, the Company entered into a settlement agreement with Schein
Pharmaceutical, Inc. (now part of Watson Pharmaceuticals, Inc.) relating to a 1992 agreement
regarding the pursuit of a generic conjugated estrogens product. Under the terms of the settlement,
Schein relinquished any claim to rights in Cenestin in exchange for a payment of $15,000 made to
Schein in 1999. An additional $15,000 payment is required under the terms of the settlement if
Cenestin achieves total profits (product sales less product-specific cost of goods sold, sales and
marketing and other relevant expenses) of greater than $100,000 over any five year or less period
prior to October 22, 2014.
Litigation Matters
The Company is involved in various legal proceedings incidental to its business, including
product liability, intellectual property and other commercial litigation and 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, believes 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 June 30, 2005, the Company’s reserve for the liability associated with claims or related defense
costs for these matters, other than the Desogestrel/Ethinyl Estradiol matter described below, 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 tablets and ethinyl
estradiol tablets, the generic equivalent of Organon Inc.’s Mircette ® 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® 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 and,
because of this, it continues to market and sell Kariva.
Nevertheless, Organon seeks to recover lost profits or a reasonable
royalty of up to $100,000 from the date of launch through June 30,
2005. If BTG and Organon are successful, the Company could be liable
for damages for
F-29
patent
infringement and the damages could be significant.
In addition, an adverse ruling likely would prohibit the Company from continuing to sell its Kariva
product.
On June 15, 2005 the Company entered into a non-binding Letter of Intent (“LOI”) with Organon
(Ireland) Ltd., Organon USA and Savient Pharmaceuticals, Inc. to acquire the NDA for Mircette,
obtain a royalty free patent license to promote Mircette in the United States and dismiss all
pending litigation between the parties in exchange for a payment by the Company of up to $155,000.
The parties will not be contractually bound unless and until they negotiate and execute definitive
agreements and the pending anti-trust review is satisfactorily resolved, as discussed below. If consummated, the
transaction would permit the Company to promote Mircette through its Duramed sales force, which
could increase sales of both Mircette and Kariva. If the transaction is not
consummated, the Company expects to continue to vigorously defend its position in the Mircette
litigation.
In
July 2005, the parties made the required Hart Scott Rodino filings with the Federal Trade Commission (“FTC”)
regarding the proposed transaction. On August 1, 2005, the FTC issued a “second request,” asking
the Company and Organon to provide detailed information concerning the proposed transaction. The
second request signals possible FTC concerns about the proposed transaction and creates additional
uncertainty whether the transaction will be consummated on the proposed, or other terms.
The
proposed transaction is contingent upon satisfactory completion of
the FTC’s Hart Scott Rodino review and the negotiation of mutually satisfactory definitive agreements.
However, because the proposed transaction includes, as one of its components, a payment in
settlement of litigation, it is presumed under Generally Accepted Accounting Principles (“GAAP”) to
give rise to a “probable loss,” as defined in SFAS No. 5, “Accounting for Contingencies”. In
consultation with outside advisors and based on preliminary valuations of the assets the Company
would acquire if the transaction closes on the terms presently contemplated, the Company has
recorded a charge of $63,238 as of June 30, 2005 to reflect the proposed litigation settlement.
The Company may reverse the charge, in whole or in part, in the future if the transaction does not
close and it prevails in the litigation or is ultimately held liable for a lesser amount of
damages. If the transaction does not close and an unfavorable verdict were to be rendered against
the Company at trial, the ultimate amount of damages payable by it could be significantly more or
less than the $63,238 charge it has recorded in connection with the propose litigation settlement.
Desmopressin Acetate Suit
In July 2002, the Company filed an ANDA seeking approval from the FDA to market desmopressin
acetate tablets, the generic equivalent of Aventis’ DDAVP product. The Company notified Ferring AB,
the patent holder, and Aventis pursuant to the provisions of the Hatch-Waxman Act in October 2002.
Ferring and Aventis filed a suit in the United States District Court for the Southern District of
New York in December 2002 for infringement of one of the four patents listed in the Orange Book for
desmopressin acetate tablets, seeking to prevent the Company from marketing desmopressin acetate
tablets until the patent expires in 2008. In January 2003, the Company filed an answer and
counterclaim asserting non-infringement and invalidity of all four listed patents. In January
2004, Ferring amended their complaint to add a claim of willful infringement.
On February 7, 2005, the court granted summary judgment in the Company’s favor. Ferring and
Aventis have appealed. On July 5, 2005, the Company launched its generic product. If Ferring and
Aventis are successful in reversing the grant of summary judgment and ultimately prevail in the
case, the Company could be liable for damages for patent infringement that could exceed the
Company’s profit on the sale of Desmopressin Acetate. In addition, an adverse ruling likely would
prohibit the Company from continuing to sell its Desmopressin Acetate product.
Product Liability Matters
Hormone Therapy Litigation
The Company has been named as a defendant in approximately 3,100 personal injury product
liability cases brought against the Company and other manufacturers by plaintiffs claiming that
they suffered injuries resulting
F-30
from the use of certain estrogen and progestin medications
prescribed to treat the symptoms of menopause. The cases against the Company 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 the Company has been named as defendants in these cases, fewer than a
third of the complaints actually allege the plaintiffs took a product manufactured by the Company,
and the Company’s experience to date suggests that, even in these cases, a high percentage of the
plaintiffs will be unable to demonstrate actual use of a Company product. For that reason, by the
end of June 2005, nearly 1,500 of the 3,100 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.
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 (CiproÒ) Antitrust Class Actions
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 (CiproÒ) from 1997 to the present. The
complaints alleged that the 1997 Bayer-Barr patent litigation settlement agreement was
anti-competitive and violated federal antitrust laws and/or state antitrust and consumer protection
laws. A prior investigation of this agreement by the Texas Attorney General’s Office on behalf of
a group of state Attorneys General was closed without further action in December 2001.
The lawsuits included nine consolidated in California state court, one in Kansas state court,
one in Wisconsin state court, one in Florida state court, and two consolidated in New York state
court, with the remainder of the actions pending in the United States District Court for the
Eastern District of New York for coordinated or consolidated pre-trial proceedings (the “MDL
Case”). On March 31, 2005, the Court in the MDL case granted summary judgment in the Company’s
favor and dismissed all of the federal actions before it. On June 7, 2005, plaintiffs filed
notices of appeal to the United States Court of Appeals, but a briefing schedule and argument date
have not yet been set.
On September 19, 2003, the Circuit Court for the County of Milwaukee dismissed the Wisconsin
state class action for failure to state a claim for relief under Wisconsin law. Plaintiffs
appealed, but the appeal has been stayed
F-31
pending a decision by the Wisconsin Supreme Court in
another case involving similar legal issues. On October 17, 2003, the Supreme Court of the State
of New York for New York County dismissed the consolidated New York state class action for failure
to state a claim upon which relief could be granted and denied the plaintiffs’ motion for class
certification. Plaintiffs have appealed that decision, with briefing to be completed in the fall
of 2005. 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 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 these matters. The Company anticipates that these matters may
take several years to resolve, and although it is not possible to forecast the outcome of these
matters, an adverse judgment in any of the pending cases could adversely affect 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.
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, Cattaraugus, Cayuga, Chautauqua, Chenango, Erie, Fulton, Genesee, Greene, Herkimer,
Jefferson, Madison, Monroe, Nassau, Niagara, Oneida, Onondaga, Putnam, Rensselaer, Rockland,
Saratoga, St. Lawrence, Steuben, Suffolk, Tompkins, Warren, Washington, Wayne, Westchester, and
Yates. In each of these matters, the plaintiffs seek to recover damages and other relief for
alleged overcharges for prescription medications paid for or reimbursed by their respective
Medicaid programs. The Company believes that it has not engaged in any improper conduct and is
vigorously defending itself.
The Commonwealth of Massachusetts case and the New York cases, with the exception of the
action filed by Erie County, are currently pending in the United States District Court for the
District of Massachusetts. Those actions are at an early stage with no trial dates set. The Erie
County case is currently stayed in the United States District Court for the Western District of New
York, and the Judicial Panel on Multi-District Litigation has been asked to transfer the action to
the District of Massachusetts.
The Alabama case was filed in Alabama state court, removed to the United States District Court
for the Middle District of Alabama, and recently returned to state court with no trial date
currently set. The Illinois case was filed in Illinois state court and recently removed to the
United States District Court for the Northern District of Illinois, with a pending motion to return
the case to state court and no trial date currently set. The Kentucky case was filed in
Kentucky state court and recently removed to the United States District Court for the Eastern
District of Kentucky, with a pending motion to return the case to state court and no trial date
currently set.
F-32
Other Litigation
As of June 30, 2005, the Company was involved with other lawsuits incidental to its business,
including patent infringement actions, product liability, and personal injury claims. Management,
based on the 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.
(18) Segment Reporting
The Company operates in two reportable business segments: generic pharmaceuticals and
proprietary pharmaceuticals.
Generic Pharmaceuticals
Generic pharmaceutical products are therapeutically equivalent to a brand name product and are
marketed primarily to wholesalers, retail pharmacy chains, mail order pharmacies and group
purchasing organizations. These products are approved for distribution by the FDA through the ANDA
process. The Company also distributes, from time to time, product manufactured for Barr by the
brand name company. Tamoxifen and Ciprofloxacin are examples of products Barr has distributed and
are included in the generic pharmaceuticals segment.
In fiscal year 2005, three customers accounted for 23%, 17% and 11% of generic sales. In
fiscal year 2004, three customers accounted for 24%, 14% and 13% of generic product sales.
In 2003, four customers accounted for 21%, 17%, 13% and 11% of total generic product
sales.
Proprietary Pharmaceuticals
Proprietary pharmaceutical products are generally patent-protected products marketed directly
to health care professionals. These products are approved by the FDA primarily through the New
Drug Application process. Barr’s proprietary segment also includes products whose patents have
expired but continue to be sold under trade names to capitalize on prescriber and customer
loyalties and brand recognition.
In fiscal year 2005, 2004 and 2003, three customers accounted for 25%, 18%, 10% and 21%, 20%,
15% and 15%, 19%, 11% of proprietary product sales, respectively.
The accounting policies of the segments are the same as those described in Note 1. The
Company evaluates the performance of its operating segments based on net revenues and gross profit.
Barr does not report depreciation expense, total assets and capital expenditures by segment as such
information is neither used by management nor accounted for at the segment level. Net revenues and
gross profit information for the Company’s operating segments consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product |
|
2005 |
|
|
% of sales |
|
|
2004 |
|
|
% of sales |
|
|
2003 |
|
|
% of sales |
|
Product Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary |
|
$ |
278,786 |
|
|
|
27 |
% |
|
$ |
146,087 |
|
|
|
11 |
% |
|
$ |
57,662 |
|
|
|
6 |
% |
Generic |
|
|
751,388 |
|
|
|
73 |
% |
|
|
1,150,622 |
|
|
|
89 |
% |
|
|
837,226 |
|
|
|
94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales |
|
$ |
1,030,174 |
|
|
|
100 |
% |
|
$ |
1,296,709 |
|
|
|
100 |
% |
|
$ |
894,888 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
Margin % |
|
|
|
|
|
Margin % |
|
|
|
|
|
Margin % |
Proprietary |
|
$ |
239,516 |
|
|
|
86 |
% |
|
$ |
117,994 |
|
|
|
81 |
% |
|
$ |
48,536 |
|
|
|
84 |
% |
Generic |
|
|
486,578 |
|
|
|
65 |
% |
|
|
545,970 |
|
|
|
47 |
% |
|
|
422,253 |
|
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
726,094 |
|
|
|
70 |
% |
|
$ |
663,964 |
|
|
|
51 |
% |
|
$ |
470,789 |
|
|
|
53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
(19) Quarterly Data (Unaudited)
A summary of the quarterly results of operations is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Month Period Ended |
|
| |
|
Sept. 30 |
|
|
Dec. 31 |
|
|
Mar. 31 |
|
|
Jun. 30 |
|
FISCAL YEAR 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
244,508 |
|
|
$ |
257,369 |
|
|
$ |
265,007 |
|
|
$ |
280,515 |
|
Cost of sales |
|
|
69,638 |
|
|
|
78,059 |
|
|
|
77,653 |
|
|
|
78,730 |
|
Net earnings |
|
|
52,135 |
|
|
|
59,387 |
|
|
|
61,345 |
|
|
|
42,121 |
|
Earnings per common share — diluted (1) |
|
$ |
0.49 |
|
|
$ |
0.56 |
|
|
$ |
0.58 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRICE
RANGE OF COMMON STOCK |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
42.80 |
|
|
$ |
46.90 |
|
|
$ |
50.45 |
|
|
$ |
54.29 |
|
Low |
|
$ |
32.01 |
|
|
$ |
35.07 |
|
|
$ |
43.71 |
|
|
$ |
47.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
310,711 |
|
|
$ |
374,124 |
|
|
$ |
321,085 |
|
|
$ |
303,168 |
|
Cost of sales |
|
|
160,901 |
|
|
|
207,722 |
|
|
|
145,288 |
|
|
|
118,834 |
|
Net earnings |
|
|
38,535 |
|
|
|
35,069 |
|
|
|
35,139 |
|
|
|
14,360 |
|
Earnings per common share — diluted
(1) (2) |
|
$ |
0.37 |
|
|
$ |
0.33 |
|
|
$ |
0.33 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRICE
RANGE OF COMMON STOCK (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
50.33 |
|
|
$ |
56.91 |
|
|
$ |
53.99 |
|
|
$ |
49.25 |
|
Low |
|
$ |
38.83 |
|
|
$ |
45.17 |
|
|
$ |
45.70 |
|
|
$ |
32.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
The sum of the individual quarters may not equal the full year amounts due to the effects of
the market prices in the application of the treasury stock method. During its three most
recent fiscal years, the Company did not pay any cash dividends. |
| |
| (2) |
|
Adjusted for the March 16, 2004 3-for-2 stock split effected in the form of a 50% stock
dividend (See Note 1). |
F-34
SCHEDULE II
BARR PHARMACEUTICALS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended June 30, 2005, 2004 and 2003
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
Additions, |
|
|
|
|
| |
|
Beginning |
|
Costs and |
|
Deductions, |
|
Balance at |
| (In thousands) |
|
of Year |
|
Expenses |
|
Write-offs |
|
End of Year |
Reserve for returns and
allowances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2003 |
|
$ |
29,260 |
|
|
$ |
48,683 |
|
|
$ |
(24,978 |
) |
|
$ |
52,965 |
|
Year Ended June 30, 2004 |
|
|
52,965 |
|
|
|
64,446 |
|
|
|
(59,909 |
) |
|
|
57,502 |
|
Year Ended June 30, 2005 |
|
|
57,502 |
|
|
|
84,033 |
|
|
|
(88,816 |
) |
|
|
52,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Inventory reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2003 |
|
$ |
10,236 |
|
|
$ |
10,280 |
|
|
$ |
(7,315 |
) |
|
$ |
13,201 |
|
Year Ended June 30, 2004 |
|
|
13,201 |
|
|
|
17,058 |
|
|
|
(6,349 |
) |
|
|
23,910 |
|
Year Ended June 30, 2005 |
|
|
23,910 |
|
|
|
2,787 |
|
|
|
(13,282 |
) |
|
|
13,415 |
|
S-1