FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2006
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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
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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400 Chestnut Ridge Road |
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Woodcliff Lake, New Jersey
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07677-7668 |
(Address of principal executive offices)
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(Zip Code) |
201-930-3300
(Registrants 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 if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
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 Registrants 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. o
Indicate by check mark whether
the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
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, 2005,
the last business day of the Registrants most recently completed second fiscal quarter, was
approximately $6,700,000,000. 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 14, 2006,
there were 106,294,289 shares of the Registrants 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 Registrations definitive proxy statement relating to the
annual meeting of shareholders to be held on November 9, 2006, 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, 2006
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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 Managements Discussion and Analysis of Financial Condition and Results of
Operations Forward-Looking Statements and Item 1A, Risk Factors.
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, 2006, we
recorded net earnings of $336 million on revenues of $1.3 billion. Of our $1.3 billion of revenues
in fiscal 2006, $839 million were from sales of our generic products, $330 million were from sales
of our proprietary products, and $146 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
approximately 150 different dosage forms and strengths of approximately 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 19
proprietary pharmaceutical products, largely concentrated in the womens healthcare therapeutic
category. These products include our SEASONALE® (levonorgestrel/ethinyl estradiol 0.15
mg/0.03 mg tablets) and SEASONIQUE (levonorgestrel/ethinyl estradiol tablets 0.15
mg/0.03 mg and ethinyl estradiol tablets 0.01 mg) extended-cycle oral contraceptive products, our
Cenestin® (synthetic conjugated estrogens, A) and ENJUVIA (synthetic conjugated
estrogens, B) line of hormone therapy products, our ParaGard® T 380A (Intrauterine
Copper Contraceptive) IUD and our Plan B® emergency contraceptive (levonorgestrel)
product.
We operate manufacturing, research and development and administrative facilities in eight primary locations within the United States. Our administrative offices are located
in Woodcliff Lake, New Jersey.
Our Internet address is www.barrlabs.com. We do not intend for this website address to be an
active link or to otherwise incorporate by reference the contents of the website into this report.
On our Investor Relations portion of the website 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. The public
may read and copy any materials that we file with the SEC at the SECs Public Reference Room or
electronically through the SEC website (www.sec.gov). Also within the Investor Relations portion of
our website, we provide information concerning corporate governance, including our Corporate
Governance Guidelines, Board Committee Charters and Composition, Code of Conduct and other
information.
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 the development of and the opportunity to market, generic biopharmaceuticals. |
Developing and Marketing Selected Generic Pharmaceuticals
We develop and market the generic equivalent of brand pharmaceuticals. These products are
marketed under the label of our subsidiary Barr Laboratories, Inc. (Barr). 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 developing generic products, we generally conduct studies to establish that our product is
bioequivalent to the brand product, and determine, in consultation with legal counsel whether (1)
our product infringes the patents of the owner of the New Drug Application (NDA) relating to that
product or of the innovator or (2) such patents are invalid or unenforceable. 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 by filing an Abbreviated New Drug Application (ANDA) with the FDA. In most
cases, bioavailability and bioequivalence studies, but 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 equivalent, within specified limits, 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.
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capitalize the inventory costs associated with certain products prior
to receiving FDA final marketing approval for those products (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 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 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 the patents on Prozac and
DDAVP or entering into settlements that allow us to market the products
before the patents expire, such as the settlement that resulted in our launch of Cipro
® in June 2003, or our settlement that resulted in our Niaspan®/Advicor®
co-promotion agreements and the right to launch our generic version of
the products prior to
patent expiry. 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 a final decision in their patent challenge
litigation, a so-called at-risk-launch. See Generic
Pharmaceuticals Pending Patent Challenges.
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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 89% in fiscal
2004, 73% in fiscal 2005, and 72% in fiscal 2006. The declining percentage over time reflects the
increasing contribution from our proprietary products over that same period.
Developing and Marketing Proprietary Pharmaceuticals
We develop, manufacture and market proprietary pharmaceutical products under the label of
our subsidiary Duramed Pharmaceuticals, Inc. (Duramed). 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 require more extensive research and development activities on our part
compared with our generic products, they offer the potential for a longer period of market or
product exclusivity and may generate greater returns than most of our generic products. The same
is true for the proprietary products that we acquire, although they often involve less development
risk. Actively promoted proprietary products require greater sales and marketing expenses than
generic products because we need to promote them directly to healthcare providers using our sales
representatives and, in some cases, directly to consumers through direct-to-consumer advertising.
Examples of this are our SEASONALE and ENJUVIA products that we launched in November 2003 and May 2006, respectively.
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, derived primarily 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.
The regulatory process for approval of an NDA is discussed in greater detail below under
Government Regulation New Drug Application Process.
Typically, we capitalize pre-launch inventories associated with the filing of an NDA based on
the same expectations as we have with an ANDA. We do not begin to capitalize manufacturing related
costs until the related product candidates have an NDA filed, and in the case of raw material and
packaging components to an NDA product we do not begin to capitalize these costs until the product
development process has progressed to a point where we have determined that the product has a high
probability of regulatory approval.
As a percentage of our total product sales, sales of our proprietary products accounted for
11% in fiscal 2004, 27% in fiscal 2005, and 28% in fiscal 2006.
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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 a significant subset of pharmaceutical products that are
manufactured with the use of live organisms as opposed to chemical (non-biological) compounds. The
pharmaceutical products we currently market utilize chemical compounds as their main ingredients.
Biopharmaceuticals represent an industry with approximately $33 billion in annual sales, and more
than 200 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. We are working with Congress, the Department of Health and Human
Services (HHS), including the FDA, and the generic industrys 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 with PLIVA d.d. (PLIVA) for the generic
biopharmaceutical Granulocyte Colony Stimulating Factor (G-CSF), a protein that stimulates the
growth of certain white blood cells, and we are actively working on the development of two
additional, undisclosed generic biopharmaceutical products.
Investment in Research and Development
Our commitment to research and development, including acquired in-process research and
development, resulted in investments of $169 million in fiscal 2004, $128 million in fiscal 2005,
and $140 million in fiscal 2006. We have consistently made these significant investments because of
our belief that a significant portfolio of products in development is critical to our long-term
success. Research and development expenditures for generic development activities typically include
internal personnel costs, third-party bioequivalence studies, costs paid to third-party
development partners and 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 over the next year in generic, proprietary and
generic biopharmaceuticals categories.
Business Development Activities
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, womens healthcare products, and products
or companies for a new, second proprietary therapeutic category. As we continue to grow, we expect
that our business development activities, including product and company acquisitions will continue
to play an important part in our strategy.
Set forth below is a list of our significant business development activities during fiscal
2006.
Proposed PLIVA
Acquisition
On June 27, 2006,
we announced that the Supervisory Board of PLIVA, a generic
pharmaceutical company with approximately $1.2 billion in
revenues, headquartered in Zagreb, Croatia, had endorsed our proposal to make
a tender offer to PLIVAs shareholders to purchase 100% of the shares of PLIVA. On July 28, 2006,
in accordance with the law of the Republic of Croatia governing tender offers, our newly formed
European subsidiary, Barr Laboratories Europe B.V., officially filed our tender offer with the
Croatian Financial Services Supervisory Agency (HANFA). Under the terms of the formal $2.3
billion cash tender offer, PLIVA shareholders who tender their shares will receive HRK 743 per
share in cash. In addition, shareholders that are registered as shareholders at the Central
Depository Agency as of August 22, 2006 will receive the dividend of HRK 12 per share, for a total
cash consideration of HRK 755 per
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share. On August 10, 2006, HANFA
approved our tender offer for publication thus initiating
the tender offer process. If we are successful in the tender process, we expect the acquisition to
close in October or November 2006.
On August 9, 2006,
another pharmaceutical company filed a competing bid with HANFA,
though that bid had not been approved as of the date of this filing.
If we
acquire PLIVA, the combined company would be the third
largest global generic pharmaceutical company, based on the combined revenues of approximately $2.4
billion for the twelve-month period ended March 31, 2006. We believe that the combination
of Barr and PLIVA will unite the unique pharmaceutical development and manufacturing strengths of
each partner, the unique markets in which each excels, and the expertise of a U.S.-based and
European-based management team to create a powerful, global pharmaceutical leader with a broad
portfolio of solid oral dosage form products with the ability to create a broad portfolio of
injectable, cream/ointment, and biopharmaceutical products. In addition, the combined company will
have active pharmaceutical ingredient (API) capabilities. The combination would also provide a
solid foundation for accelerating the development of generic biopharmaceutical products, building
upon PLIVAs biologic research program and the existing development venture between PLIVA and us
for G-CSF in North America, which we entered into in March 2005.
We intend to finance the purchase price and transaction costs with a portion of our cash
reserves and borrowings under a new Senior Credit Facility that we entered into on July 21, 2006. The
Senior Credit Facility consists of $2.5 billion of term loans and a $300 million revolving credit
facility.
Product Development Acquisitions/Licenses:
ParaGard® IUD
On November 10, 2005, our Duramed Pharmaceuticals subsidiary acquired FEI Womens Health, LLC
(FEI) for $289.7 million in cash, expanding our presence into the non-hormone contraceptive
product marketplace. FEI is the maker of the ParaGard T 380A (Intrauterine Copper Contraceptive)
IUD, which is approved for continuous use for the prevention of pregnancy for up to 10 years.
ParaGard, which was approved in 1984 and has been marketed in the United States since 1988, generated sales of approximately $50 million in the twelve months prior to the acquisition. Duramed
promotes ParaGard to womens healthcare practitioners utilizing its Specialty Sales Force.
Mircette®
On
December 2, 2005, our Duramed Pharmaceuticals subsidiary entered
into an agreement with Organon USA Inc., Organon (Ireland)
Ltd., and Savient Pharmaceuticals, Inc. to acquire the exclusive
rights to Organons Mircette (Desogestrel/Ethinyl Estradiol),
oral contraceptive product. As a result, the ongoing patent litigation regarding Barrs generic version of Mircette,
which we market under the trade name Kariva®, was terminated. Duramed promotes Mircette
to womens healthcare practitioners utilizing its specialty sales force.
ACTIQ®
On February 1, 2006, our Barr Laboratories subsidiary entered into an agreement with Cephalon
to settle our patent infringement litigation in the United States related to ACTIQ, a product which
is indicated for cancer pain management and had sales of $412 million for the twelve months ended
December 2005, based on industry sources. This agreement (the Supplemental License Agreement)
supplements the license Cephalon previously granted us on August 10, 2004, (the Existing License)
pursuant to an order of the Federal Trade Commission (FTC). The Supplemental License Agreement
will go into effect only if the Existing License is not otherwise effective on December 6, 2006,
and will cease to be effective if the Existing License agreement becomes effective.
Under the Supplemental License Agreement, we will have an exclusive, royalty-bearing right to
market and sell a generic version of ACTIQ in the United States no later than December 6, 2006, and
Cephalon will agree not to market, sell or license an authorized generic version of ACTIQ until
February 3, 2007. Under the terms of the
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Existing License, we will have a non-exclusive right to sell a generic version of ACTIQ
effective on the earlier of final approval of Cephalons FENTORA (fentanyl buccal
tablet) or September 5, 2006, if Cephalon does not receive the six-month pediatric extension it is
seeking. The agreement also obligates Cephalon to supply us with ACTIQ for resale if we cannot
obtain FDA approval of our ANDA for the generic version of ACTIQ prior to the licenses effective
date. We have already ordered Cephalon manufactured product for resale, regardless of which
licensing agreement we launch under.
PROVIGIL®
On February 1, 2006, our Barr Laboratories subsidiary entered into another agreement with
Cephalon to settle our patent infringement litigation in the United States related to PROVIGIL,
indicated for certain sleep disorders. Under the terms of the
settlement, Cephalon granted us a
non-exclusive, royalty-bearing license to market and sell a generic version of PROVIGIL effective
in October 2011, unless Cephalon obtains a pediatric extension
for PROVIGIL in which case the license will become effective in April 2012. We may also enter
the market at an earlier time based upon the
entry of another generic version of PROVIGIL.
Other Significant Developments in Fiscal 2006
In addition to the business development activities described above, set forth below are some
additional significant developments that occurred in fiscal 2006.
Launch of Generic Allegra® (Fexofenadine Hydrochloride Tablets)
In
June 2005, we entered into an agreement with Teva Pharmaceutical Industries
Ltd. (Teva) for the launch of Fexofenadine Hydrochloride 30 mg, 60 mg and 180 mg
Tablets, the generic versions of Sanofi-Aventis Pharmaceuticals Allegra Tablets for the
treatment of seasonal allergy symptoms. Under the agreement, we took the regulatory steps necessary
to permit Teva to obtain final FDA approval of Tevas fexofenadine hydrochloride tablets and to
sell the product within our 180-day exclusivity period. In return, we receive a negotiated
percentage of net sales, as defined, from the sale of Tevas product both during and after
the 180-day exclusivity period. We record our royalties in
alliance, development and other revenue in our financial statements. We and Teva are currently in
patent litigation with Sanofi-Aventis and Albany Molecular Research, Inc. regarding fexofenadine
hydrochloride tablets. Currently, there is no trial date scheduled.
Launch of ENJUVIA (synthetic conjugated estrogens, B)
In May 2006, we launched our ENJUVIA (synthetic conjugated estrogens, B) tablets and
immediately initiated physician detailing using Durameds 250-person Womens Healthcare Sales
Force. ENJUVIA is approved as daily oral estrogen therapy for the treatment of moderate-to-severe
vasomotor symptoms associated with menopause. A plant-derived formulation, ENJUVIA contains a blend
of 10 synthetic estrogenic substances including Delta 8, 9 dehydroesterone sulfate (DHES).
ENJUVIA tablets are available in a variety of dosage strengths including 0.3 mg, 0.45 mg, 0.625 mg
and 1.25 mg. ENJUVIA uses a unique delivery system, consisting of Surelease® technology
with a cellulose-based polymer tablet design, to provide slow release of estrogens over several
hours. Our promotion of ENJUVIA has replaced promotion of our Cenestin® hormone therapy
product.
SEASONIQUE Extended-Cycle Oral Contraceptive Approval and Launch
In May 2006, the FDA approved our NDA for SEASONIQUE (levonorgestrel/ethinyl estradiol tablets
0.15 mg/0.03 mg and ethinyl estradiol tablets 0.01 mg), our second extended-cycle oral
contraceptive for the prevention of pregnancy. SEASONIQUE represents the next generation of
extended-cycle oral contraceptives in a category that we created with the launch of the
SEASONALE® in 2003. In July 2006, we launched SEASONIQUE to the trade and began
initiating full-scale detailing to healthcare providers in August 2006 using Durameds Womens
Healthcare Sales Force.
Implementation of ERP System from SAP
In May 2006, we completed the last of three phases of a company-wide enterprise resource
planning (ERP) system from SAP. In addition to expanding and improving access to information, our
new ERP system is providing
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a standard scalable information platform to accommodate the anticipated growth in our
business. We have invested over $67 million in this new system, which is 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. In connection with our new ERP system, we have updated internal control
over financial reporting, as necessary, to accommodate modifications to our business processes and
to take advantage of enhanced automated controls provided by the system.
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
equivalent 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 2006, we continued our commitment to develop and market generic products. More
specifically, during fiscal 2006, we:
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filed 12 ANDAs; |
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received FDA approvals for 10 generic products; and |
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launched seven new generic products. |
At June 30, 2006, we had approximately 40 ANDAs, including tentatively approved applications,
pending at the FDA targeting branded pharmaceutical products with an estimated $11 billion in sales
for the 12 months ended June 30, 2006, 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
development activities.
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,
creams, injectables, nasal sprays, and sterile ophthalmics.
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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Barr Label |
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Brand Equivalent |
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Therapeutic Category |
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Amphetamine Salts Combination |
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Adderall® |
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Psychotherapeutics |
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Apri® |
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Desogen® |
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Womens 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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Womens 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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Desmopressin |
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DDAVP® |
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Diabetes |
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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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Womens Healthcare |
(Desogestrel and Ethinyl Estradiol) |
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Lessina® |
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Levlite® |
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Womens 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 |
|
Womens Healthcare |
(Norethindrone and Ethinyl Estradiol) |
|
|
|
|
|
|
|
|
|
Sprintec® |
|
Ortho-Cyclen® |
|
Womens Healthcare |
(Norgestimate and Ethinyl Estradiol) |
|
|
|
|
|
|
|
|
|
Tri-Sprintec® |
|
Ortho Tri-Cyclen® |
|
Womens Healthcare |
(Norgestimate and Ethinyl Estradiol) |
|
|
|
|
|
|
|
|
|
Warfarin Sodium |
|
Coumadin® |
|
Cardiovascular |
Set
forth below are descriptions of certain generic products or product
categories that contributed significantly to
our sales and gross profit in fiscal 2006. 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. Our oral
contraceptives compete in the contraceptive market, which had sales of approximately $3.9 billion
based on industry sources for the twelve months ended June 2006, 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
10
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
competitor in this category is Watson Pharmaceuticals (Watson), a large
generic pharmaceutical company that markets and distributes a sizeable portfolio of generic oral
contraceptive products. Additional generic competitors include Teva Pharmaceuticals, a global
pharmaceutical company that currently markets two generic oral contraceptive products manufactured
by Andrx Corporation (Andrx), and a small, privately held pharmaceutical company that distributes
authorized generic versions of two oral contraceptive products. In
March 2006, Watson announced that it intends to acquire Andrx. It is not yet clear how this pending
transaction, currently expected to close in November 2006, will affect the generic oral
contraceptive market place. Sales of our portfolio of generic oral contraceptives increased
approximately 1% in fiscal 2006 to $400 million compared to fiscal 2005. We had initially estimated
a 10% decrease for our generic oral contraceptive products year-over-year primarily due to the
continued impact of competition on certain of our larger generic oral contraceptives products, such
as Aviane® and Apri®. However, during fiscal 2006 manufacturing difficulties
experienced by certain of our competitors reduced the expected competition for certain of our
products and, as a result, sales of our generic oral contraceptives did not decline as we initially
expected. We expect that sales of our generic oral contraceptives will likely experience a decline
in the next twelve months as our competitors solve their
manufacturing issues, and volume declines
associated with these non-promoted products more than offset increasing generic substitution rates.
However, we believe that our large portfolio of generic oral contraceptives will remain a
significant component of our total revenues.
Desmopressin
Acetate Tablets. Our Desmopressin product is the generic equivalent of Ferring
B.V.s
DDAVP®
Tablets. Ferring manufactures DDAVP for Sanofi-Aventis, which
markets the product in the United States. DDAVP Tablets are 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. They are also
indicated for the management of primary nocturnal enuresis. We launched Desmopressin Acetate
Tablets, 0.1 mg and 0.2 mg on July 5, 2005 following a district
court ruling that applicable DDAVP patent was unenforceable and therefore not infringed. 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) and,
as a result, we were entitled to 180 days
of marketing exclusivity on the product. After our 180-day
exclusivity period ended, two additional
competitors launched generic versions of DDVAP.
Didanosine Delayed-Release Capsules. Our Didanosine product is the generic equivalent of
Bristol-Myers Squibbs Videx® EC (Didanosine) delayed-release capsules. In combination
with other anti-retroviral agents, Didanosine 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 for Didanosine contained a paragraph IV
certification, and we were the first filer of an ANDA containing that certification. Following FDA
notification of acceptance for filing, we notified Bristol-Myers Squibb, the NDA holder, and the
National Institute of Health, the patent owner, of our ANDA filing. No action was filed against us
within the 45-day period specified in the Hatch-Waxman Act. As the first filer of an ANDA
containing a paragraph IV certification, we 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
Squibbs
Coumadin®,
an anticoagulant for patients with heart disease or high risk of
stroke. We launched Warfarin Sodium in July 1997. During the twelve months ended June 30, 2006, two
additional generic versions of Warfarin were approved. We are presently one of four
generic suppliers of the product.
Claravis (Isotrentinoin Capsules). Our Claravis product is the generic equivalent
of Roche Pharmaceuticals Accutane® capsules for the treatment of severe recalcitrant
nodular acne that is not responsive to other treatments. We market the 10 mg, 20 mg, 30 mg and 40
mg strengths under the Claravis trade name. We launched the 10 mg, 20 mg, and 40 mg strengths in
May 2003 and our 30 mg strength in May 2006. Currently, Claravis competes in a market that includes
two additional generic isotrentinoin products and the Accutane brand. Isotrentinoin products are
known to cause birth defects and, therefore, are prescribed under a highly restrictive risk
management program. Effective January 1, 2006, manufacturers and marketers of isotrentinoin
products, in cooperation with the FDA, implemented an enhanced risk management program under the
name iPledge that is designed to minimize fetal
11
exposure to isotrentinoin. As of March 1, 2006 all isotrentinoin manufacturers and marketers,
including us, were fully participating in this enhanced risk management program.
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, work toward eliminating 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.
12
As of June 30,
2006, we had publicly disclosed the following patent challenges that are in
various stages of litigation:
|
|
|
|
|
|
|
|
|
Branded |
|
|
ANDA NAME (Brand Product) |
|
Sales in Millions* |
|
Therapeutic Category |
|
Fentanyl
Citrate Lozenges
(ACTIQ®) |
|
$ |
569 |
|
|
Onconolgy |
|
|
|
|
|
Dextro Extended Release (ADDERALL® XR) |
|
|
1,065 |
|
|
ADHD |
|
|
|
|
|
Drospirenone and Ethinyl Estradiol (YASMIN®) |
|
|
492 |
|
|
Womens Healthcare |
|
|
|
|
|
Fexofenadine (Allegra®) |
|
|
1,152 |
|
|
Antihistamines |
|
|
|
|
|
Fexofenadine (Allegra D®) |
|
|
384 |
|
|
Antihistamines |
|
|
|
|
|
Fluoxetine HCl (Prozac® Weekly) |
|
|
36 |
|
|
Psychotherapeutic |
|
|
|
|
|
Galantamine Hydrobromide Tablets (RAZADYNE®) |
|
|
129 |
|
|
Alzheimers |
|
|
|
|
|
Galantamine Hydrobromide Extended-Release Capsules
(RAZADYNE® ER) |
|
|
54 |
|
|
Alzheimers |
|
|
|
|
|
Norgestimate/Ethinyl Estradiol (TRI-CYCLEN LO®) |
|
|
375 |
|
|
Womens Healthcare |
|
|
|
|
|
Olanzapine ODT (ZYPREXA® Zydis® ODT) |
|
|
243 |
|
|
Psychotherapeutic |
|
|
|
|
|
Pramipexole Dihydrochloride (MIRAPEX®) |
|
|
277 |
|
|
Parkinsons |
|
|
|
|
|
Raloxifene Hydrochloride (EVISTA®) |
|
|
692 |
|
|
Osteoporosis |
|
|
|
|
|
Risperidone ODT (RISPERDAL® M-Tab) |
|
|
74 |
|
|
Anti-Psychotic |
|
|
|
|
|
Tramadol HCl & Acetaminophen (ULTRACET®) |
|
|
183 |
|
|
Pain Management |
|
|
|
|
|
Triamcinolone Acetonide (NASACORT® AQ) |
|
|
338 |
|
|
Allergies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
6,063 |
|
|
|
|
|
|
* |
|
Source: IMS Health last twelve months sales ended June 30, 2006. |
Allegra Tablets
We are involved in on-going litigation related to Fexofenadine hydrochloride, 30 mg, 60 mg and
180 mg tablets, the generic versions of Sanofi-Aventis Allegra® tablets. Following the
receipt in June 2004 of favorable summary judgment rulings of non-infringement with respect to
three patents and summary judgment in April 2005 of invalidity on an additional patent, in June
2005 we entered into an agreement with Teva for the launch of these tablets. Under this
arrangement, we took the regulatory steps necessary to permit Teva to obtain final FDA approval of
Tevas fexofenadine hydrochloride tablets and to sell the product within our 180-day exclusivity
period.
Notwithstanding those favorable rulings, several patents remain in litigation. Together with
Teva, we launched this product at risk, meaning prior to the rendering of a final decision in the
patent challenge litigation by the
13
appellate courts. Following the launch of Tevas fexofenadine
hydrochloride tablets, Sanofi-Aventis along with Albany Molecular Research, Inc. filed a motion for
a preliminary injunction with the U.S. District Court for the District of New Jersey, seeking to
enjoin us and Teva from marketing a generic version of Allegra tablets, or to expedite the trial in
the case. In January 2006, the Court denied the motion seeking the preliminary injunction.
Currently, there is no trial date scheduled.
Adderall XR
On August 14,
2006, we entered into a settlement and license agreement relating to the
resolution of two pending patent cases involving Shires ADDERALL
XR®. The
agreements, which include a provision allowing Barr to enter the market before patent expiry,
have been submitted to the FTC as required by law and will become effective upon the courts signing of
consent judgments in the two pending cases.
We will continue to
pursue patent challenges and will evaluate future at risk launches based
on the strength of our case.
Sales and Marketing
We market
our generic products to customers in the United States and Puerto Rico under the
Barr Laboratories 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 100 distinct customers that purchase directly
from us, and indirectly to approximately 55 distinct customers that contract directly with us but
purchase our products through one of our direct customers. Sales to customers who accounted for 10%
or more of our generic product sales during the three years ended June 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
McKesson Drug Company |
|
|
27 |
% |
|
|
23 |
% |
|
|
24 |
% |
Cardinal Health |
|
|
15 |
% |
|
|
17 |
% |
|
|
14 |
% |
AmeriSource Bergen |
|
|
11 |
% |
|
|
11 |
% |
|
|
|
* |
Walgreens |
|
|
|
* |
|
|
|
* |
|
|
13 |
% |
|
|
|
* |
|
Denotes less than 10% in the period indicated. |
Proprietary Pharmaceuticals
We develop
our proprietary pharmaceutical products both through internal efforts and through
company, product and/or technology platform acquisitions or licenses. Our proprietary products are
marketed under the Duramed Pharmaceuticals label and several are promoted directly to healthcare
providers by our two sales forces and, in some cases, consumers through direct-to-consumer
advertising and promotions. 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.
14
Research and Development
In identifying candidates for product development, we generally seek out products and
compounds with some or all of the following characteristics:
|
|
|
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 focused primarily on expanding our portfolio of
womens healthcare products which includes oral contraceptives, hormone therapy treatments for
menopause/perimenopause and treatment for endometriosis, labor and delivery and breast disease. An
important part of our product development strategy is to develop a broad line of products designed
to meet the unmet medical needs of women. Our focus in the area of extended-cycle oral
contraception, which we established with the launch of SEASONALE in 2003, is providing women with
the option of four periods per year. In addition and in response to current contraception trends of
altering the hormone interval, we are also committed to providing women with the option of low dose
estrogen instead of a hormonal free interval, as is available in our SEASONIQUE and Mircette
products. We are also pursuing a urology product, that utilizes our transvaginal ring technology to
treat urinary incontinence.
In areas other than womens healthcare we are pursuing a second urology product targeted at
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. We continue to identify other proprietary product
candidates that further expand our product offerings in womens healthcare 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 June
2006 we had a broad pipeline of short-, mid- and long-term opportunities that include several
proprietary products in clinical development, two of which are in Phase III studies, and several
NDAs pending at the FDA.
Our proprietary research and development team has experience in managing clinical development
programs and regulatory matters. This team works closely with our generic formulation,
manufacturing and regulatory groups to maximize the efficiency and effectiveness of our development
process.
Proprietary Product Portfolio
We currently sell 19 proprietary products, several of which are promoted directly to
physicians and several of which are no longer actively promoted. 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.
The following
are the proprietary products that we are actively promoting:
|
|
|
SEASONIQUE (Levonorgestrel/Ethinyl Estradiol and Ethinyl Estradiol)
extended-cycle oral contraceptive |
|
|
|
|
ENJUVIA (Synthetic Conjugated Estrogens, B) hormone therapy |
|
|
|
|
ParaGard® T 380A (Intrauterine Copper Contraceptive) IUD |
|
|
|
|
Mircette® (Desogestrel and Ethinyl Estradiol) oral contraceptive |
|
|
|
|
Plan B® (Levonorgestrel) emergency oral contraceptive |
15
|
|
|
Niaspan® (Niacin Extended-Release Tablets) for high cholesterol (marketed
under agreement with Kos Pharmaceuticals, Inc.) |
|
|
|
|
Advicor® (Niacin Extended-Release/Lovastatin Tablets) for high cholesterol
(marketed under agreement with Kos Pharmaceuticals, Inc.) |
The following are the proprietary products that we are not actively promoting:
|
|
|
SEASONALE® (Levonorgestrel/Ethinyl Estradiol) extended-cycle oral contraceptive |
|
|
|
|
Cenestin® (Synthetic Conjugated Estrogens, A) hormone therapy |
|
|
|
|
Loestrin®/Loestrin® Fe (Norethindrone Acetate and Ethinyl Estradiol) oral contraceptives |
|
|
|
|
Diamox® Sequels® (Acetazolamide) for glaucoma |
|
|
|
|
ViaSpan® (Cold Storage Solution) transplant preservation agent |
|
|
|
|
Ziac® (Bisoprolol Fumarate and Hydrochlorothiazide) for hypertension |
|
|
|
|
Prefest® (Estradiol/Norgestimate) hormone therapy |
|
|
|
|
Nordette® (Levonorgestrel and Ethinyl Estradiol) oral contraceptive |
|
|
|
|
Trexall (Methotrexate) for rheumatoid arthritis |
|
|
|
|
Zebeta® (Bisoprolol Fumarate) for hypertension |
|
|
|
|
Aygestin® (Norethindrone Acetate) for amenorrhea |
|
|
|
|
Revia® (Naltrexone Hydrochloride) for alcohol dependence |
Set forth below are descriptions of certain proprietary products we market.
Extended-Cycle Oral Contraceptive Franchise
SEASONALE® Our extended-cycle oral contraceptive franchise was founded with our
SEASONALE product that is indicated for the prevention of pregnancy. Our SEASONALE NDA was approved
by the FDA on September 5, 2003 and we were granted a three-year New Product Exclusivity (NPE),
which expires on September 5, 2006. For fiscal year 2006, SEASONALE was our largest selling
proprietary product with sales of $100 million representing over 1,053,200 prescriptions filled, an
increase from $87 million of sales and 807,000 prescriptions filled in fiscal 2005 (with the
prescription data based on industry sources for the twelve months ended June 2005 and June 2006).
The majority of oral contraceptive products currently available in the United States are based
on a 28-day regimen, resulting in 13 menstrual cycles per year. 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 four menstrual cycles per year,
or one per season.
During fiscal 2006, our Duramed subsidiarys 250-person Womens Healthcare Sales Force
detailed SEASONALE to healthcare providers who we have determined to be among the most productive
prescribers of oral contraceptive products in the United States. We supported SEASONALE with a
full-scale marketing campaign that included professional education materials, medical education
initiatives, and product sampling kits that contained extensive information for patients. We
reinforced our detailing activities with medical journal advertising and a direct-to-consumer
(DTC) advertising campaign, including television, print and web-based advertising.
Following approval of our second generation extended-cycle product SEASONIQUE in
May 2006, we scaled back certain marketing efforts for SEASONALE, as well as product sampling kits,
and are preparing to launch a campaign supporting our SEASONIQUE product, as described below.
16
In June 2004,
we received notification that Watson Pharmaceuticals had filed an ANDA
containing a paragraph IV certification asserting that the patent covering SEASONALE is invalid,
unenforceable or would not be infringed
by Watsons generic product. We did not initiate patent infringement litigation with
respect to Watsons ANDA. In July 2004, we submitted U.S. Patent No. 5,898,032 (032) patent
covering SEASONALE for reissue with the Patent and Trademark Office (PTO) and in May 2006,
received a Non-Final Rejection notice from PTO regarding our application for reissue of the patent.
In July 2006, we responded to the issues raised by the PTO in its Non-Final Rejection. It is
unlikely that our 032 patent could be reissued prior to expiration of our regulatory exclusivity
on SEASONALE. The patent covering SEASONALE will remain in effect and continue to be listed in the
FDAs 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. In July 2005, we submitted a Citizens Petition, asking the Office of Generic Drugs of the FDA
to make the determination that no ANDA submitted referencing our NDA for SEASONALE be granted final
approval unless and until such ANDA satisfies all statutory and regulatory requirements for
bioequivalence. Our request with the Office of Generic Drugs is pending. In May 2006, Watsons
ANDA received tentative FDA approval and may be eligible for final approval following the
expiration of our regulatory exclusivity on September 5, 2006.
In October 2005,
our Duramed subsidiary and Paladin Labs Inc. signed an agreement granting
Paladin an exclusive license to seek approval to market SEASONALE in Canada. On September 30, 2005,
Paladin filed the New Drug Submission for SEASONALE with the Therapeutic Products Directorate of
Health Canada. This application is still pending.
SEASONIQUE. In
May 2006, the FDA approved our NDA for SEASONIQUE
(levonorgestrel/ethinyl estradiol tablets 0.15 mg/0.03 mg and ethinyl estradiol tablets 0.01 mg),
our next generation extended-cycle oral contraceptive product. The primary difference between
SEASONIQUE and SEASONALE is that SEASONALE includes seven placebo pills between the 84th and 91st
days, whereas
SEASONIQUE provides continuous hormonal
support in the form of a low-dose of estrogen on those days. Under the
SEASONIQUE extended-cycle regimen, women take active tablets of 0.15 mg levonorgestrel/0.03 mg of
ethinyl estradiol for 84 consecutive days, followed by seven days of low dose estrogen (0.01 mg of
ethinyl estradiol). We launched SEASONIQUE in July 2006. We are initiating a fully integrated
marketing campaign aimed at healthcare providers and patients
including, professional education
materials, medical education initiatives, published data from our clinical studies demonstrating
the safety and efficacy of the extended-cycle SEASONIQUE regimen, and product sampling kits that
contain extensive information for patients. In August 2006, we initiated full scale detailing for
SEASONIQUE utilizing Durameds 250-person Womens Healthcare Sales Force 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. We intend to reinforce our detailing activities with
medical journal advertising and a direct-to-consumer advertising campaign, including television,
print and web-based advertising starting in the fall of 2006.
Emergency Contraceptive Product
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 nine states. We detail Plan B using Durameds Womens Healthcare Sales Force, and support the
marketing of Plan B with patient materials designed to be left in physicians offices, pharmacy
education, consumer print advertising and web-based marketing activities. In April 2005, Canadian
regulatory authorities approved the marketing of the Plan B without a prescription. Plan B is
distributed and marketed in Canada for us by Paladin Labs Inc.
In
August 2006, the FDA approved our application to market Plan B as an over-the-counter (OTC) product for
consumers 18 years of age and older. Women under 18 years of age seeking Plan B will continue to
require a prescription. We plan to introduce the dual status Rx/OTC version of the product before
the end of calendar 2006.
17
Hormone Therapy Product Franchise
ENJUVIA.
In May 2006, we launched our ENJUVIA (synthetic conjugated
estrogens, B) tablets and immediately initiated physician detailing using Durameds Womens
Healthcare Sales Force. ENJUVIA is approved for the treatment of moderate-to-severe vasomotor
symptoms associated with menopause. ENJUVIA tablets are available in a variety of dosage strengths
including 0.3 mg, 0.45 mg, 0.625 mg and 1.25 mg. ENJUVIA uses a unique delivery system, consisting
of Surelease® technology with a cellulose-based polymer tablet design, to provide slow
release of estrogens over several hours.
Cenestin®. Cenestin is also 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. We
continue to manufacture and market Cenestin, however, following the launch of ENJUVIA in May 2006,
we ceased detailing Cenestin directly to healthcare providers.
Our hormone therapy products, ENJUVIA and Cenestin, compete in the $1.8 billion hormone
therapy market with products such as Wyeths Premarin®, a conjugated equine estrogens
product. The hormone therapy market has declined since the findings by the National Institutes of
Health (NIH) were publicized in July 2002 and created uncertainty in the minds of many healthcare
providers and consumers regarding the risks and rewards of long-term hormone therapy. However, we
believe that a number of women and their healthcare providers will continue using ENJUVIA and
Cenestin products for the short-term treatment of moderate-to-severe vasomotor
symptoms associated with menopause.
Products in Development
We have several proprietary products in clinical development in multiple product categories.
Examples of these products are discussed in detail below.
Oral Contraception:
Lo
SEASONIQUE.
Lo
SEASONIQUE is another of our extended-cycle regimen products, under which 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 0.01 mg of ethinyl estradiol. We are
currently in Phase III studies of development and the
clinical data that we expect to support our NDA filing will result from one large pivotal
randomized, open-label, multi-center trial which is expected to end
during the quarter ending June 30,
2007.
Hormone Therapy/Estrogen Therapy:
Bijuva (Synthetic Conjugated Estrogens, A) Cream. In June 2004, we filed an NDA
for our Bijuva (Synthetic Conjugated Estrogens, A) vaginal cream product. In April 2005, the FDA
issued a Not Approvable letter for our application pending submission of additional data. We are
currently conducting Phase III clinical work that we believe will provide 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.
Transvaginal Ring (TVR) Products:
We have several products in early stages of development based on our proprietary 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.
18
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. We are currently enrolling patients into the Phase III clinical trial for this product.
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 a manufacturing and packaging facility for the vaccines, a
20,000 square foot building designed specifically to produce these vaccines. The facility is
located on our Virginia manufacturing and distribution campus. We completed our Phase I studies in
June 2006. The Phase II/III clinical program has been discussed with the FDA and is planned to
begin in the quarter ending September 30, 2006. 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 label by two sales
teams: Durameds Womens Healthcare Sales Force and its Specialty Sales Force.
Womens Healthcare Sales Force
Our
250-person Womens Healthcare Sales Force currently promotes SEASONIQUE
extended-cycle oral contraceptive, our ENJUVIA hormone
therapy products and our Plan B
emergency contraceptive product to womens healthcare practitioners. This sales force may market
additional womens healthcare products we develop or acquire.
Specialty Sales Force
We more than tripled the size
of our Specialty Sales Force to approximately 100 during fiscal 2006 to
promote our recently acquired
ParaGard®
IUD product, and SEASONIQUE to obstetricians,
gynecologists and other practitioners with a focus on womens healthcare. This sales force also promotes
Niaspan® and
Advicor®
cholesterol treatments under a co-promotion agreement
with Kos Pharmaceuticals that we entered into in April 2005.
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 three fiscal years ended June 30, 2006 were as follows:
19
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|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
McKesson Drug Company |
|
|
27 |
% |
|
|
25 |
% |
|
|
21 |
% |
Cardinal Health |
|
|
13 |
% |
|
|
18 |
% |
|
|
20 |
% |
AmeriSource Bergen |
|
|
|
* |
|
|
10 |
% |
|
|
15 |
% |
|
|
|
* |
|
Denotes less than 10% in the period indicated |
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. There are currently more than 200 biopharmaceuticals on the market, including human
insulin, interferons, human growth hormones and monoclonal antibodies, with overall sales
increasing 17% in 2005 as compared to 2004 to approximately $33 billion, based on industry source
data. In 2005, 39 new biopharmaceutical products were approved, compared to just two in 1982,
according to figures published by the Biotechnology Industry Organization. There are more than 300
biotech drug products and vaccines currently in clinical trials targeting more than 200 diseases
including cancer, Alzheimers, 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.
During fiscal 2006, there were several significant developments in the generic
biopharmaceutical arena. While Congress and the FDA continue to review options for a regulatory
pathway for generic biopharmaceuticals in the United States, the European Medicines Agency (EMA)
has already moved forward, publishing guidelines in November 2005 to streamline the process for the
approval of generic biopharmaceuticals in the European Union. Following publication of these
guidelines, the European Commission granted marketing authorization in the European Union for two
generic biopharmaceutical recombinant human growth hormone products, Sandozs Omnitrope®
product in April 2006 and Biopartners Valtropin® product in May 2006. In May 2006, the
FDA approved Sandozs Omnitrope® product as the first non-substitutable bio-generic
product of a previously approved recombinant biopharmaceutical product in the United States.
Because biopharmaceuticals are highly complex, brand innovators have sought intellectual
property protection of 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 address 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. As a result of this
strategy, in March 2005 we entered into an agreement with PLIVA to develop and market a generic
version of G-CSF in the United States and Canada, and through this agreement
20
realized that our
combination with PLIVA could create a leader in the generic biopharmaceuticals arena. If we are
successful in our proposed acquisition of PLIVA, we believe that the combined company would have an
expertise in the emerging generic biopharmaceutical arena, particularly in Europe and the United
States, that would provide a solid foundation for accelerating our development of generic
biopharmaceutical products.
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.
Significant Product Sales; Geography
The table below sets forth those products, or classes of products that accounted for 10% or
more of our total product sales during the three fiscal years ended June 30, 2006:
|
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|
|
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|
|
2006 |
|
2005 |
|
2004 |
Oral contraceptives: |
|
|
|
|
|
|
|
|
|
|
|
|
Generic (22 products) |
|
|
34 |
% |
|
|
39 |
% |
|
|
31 |
% |
Proprietary (5 products) |
|
|
16 |
% |
|
|
16 |
% |
|
|
3 |
% |
Ciprofloxacin |
|
|
|
* |
|
|
|
* | |
|
30 |
% |
|
|
|
* |
|
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. 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. Also, some suppliers are subject to Drug Enforcement Agency (DEA)
regulations, including the allocation of quotas of how much raw
material may be made available to us for the production of controlled substances. 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
21
patents, trademarks, copyrights and proprietary
technologies can often be protracted and expensive and, as with litigation generally, the outcome
is 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.
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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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
22
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.
Patent Challenges
We
actively challenge patents on branded pharmaceutical products when 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 few years the use of so-called authorized generics has increased significantly
in response to generic pharmaceutical patent challenges. Authorized generics involve the brand
pharmaceutical maker either marketing a generic version of its brand product itself or licensing
its brand drug to another company, which is then marketed in competition with the true generic
during the 180-day generic exclusivity period. Because the authorized generic is not sold under
an ANDA, but rather is sold under the brand pharmaceutical makers NDA, the courts have held that
it can compete against the patent challengers generic product during the 180-day exclusivity
period.
We believe that the marketing of authorized generics during a generic companys 180-day
exclusivity period undermines the original intent of the Hatch-Waxman Act and devalues the
incentive. In addition, authorized generics may have a chilling effect on investment in future
patent challenges by some generic pharmaceutical companies. We continue to work with Congress to
seek legislation that would restore the full value of the incentive period. In July 2006, Senators
Rockefeller and Schumer introduced Senate Bill 7928 seeking to prevent brand pharmaceutical makers
from manufacturing, marketing, selling, or distributing an authorized generic drug during a
generic companys 180-day exclusivity period.
Sales of several of our products have been impacted by the brand companys authorized
generic product launch during our 180-day exclusivity period and we anticipate that certain future
products may also face competition from authorized generics. In fiscal 2006, for example,
Sanofi-Aventis launched an authorized generic product during our 180-day exclusivity period for
generic Allegra tablets. In this example, the authorized generic captured approximately 37% of
the overall market by the end of our 180-day exclusivity period.
23
In March 2006, the FTC announced that it would be conducting a study of the use, and likely
short- and long-term competitive effects, of authorized generics in the prescription drug
marketplace. The FTC used a compulsory process to collect the information needed for the study from
approximately 80 brand-name drug manufacturers, ten companies that primarily function as
distributors of authorized generics, and 100 independent generic
manufacturers. Information was collected between March and June 5, 2006, with the Commissions
findings expected to be issued in 2007.
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
patent(s) 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 FDAs 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.
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(s) before another company was ready for approval. In contrast, the FDAs
regulations had required the first patent challenger to successfully defend its challenge to the
patent(s) 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
courts decision. The decision was in contrast to the FDAs regulation under which the exclusivity
period would not commence until the appellate court affirmed the district courts invalidity,
unenforceability, or non-infringement ruling.
In December 2003, the Medicare Prescription Drug, Improvement, and Modernization Act (MMA)
was signed into law. The MMA included provisions modifying 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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|
Only one 30-month stay allowed per drug. |
|
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|
Product-by-product exclusivity. |
24
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|
Shared 180-day exclusivity in limited circumstances. |
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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, Congress reinstated FDAs prior interpretation of court decision, meaning that
exclusivity for such applications can be triggered by first commercial marketing or by the
appellate courts affirmance of an appealed district courts ruling. Thus, for such applications,
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 filers 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.
Our Patent Challenge History
Our
efforts
in the area of challenging patents on branded pharmaceutical products have
resulted in the successful conclusion of 15 out of 17 cases as of June 30, 2006. Successful
outcomes have included court rulings in our favor invalidating patents or finding that our product
does not infringe the patent, situations in which we have not been sued for patent infringement and
settlements with the patent holder. Unfavorable outcomes, including court rulings in favor of the
patent holder, result in our not being able to launch a generic product until the patent(s) on the
brand pharmaceutical product expires. Recent examples of successful outcomes to our patent
challenges include:
|
|
|
Desmopressin. Desmopressin is the generic equivalent of Ferring B.V.s
DDAVP®
Tablets. DDAVP Tablets are 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. They are also
indicated for the management of primary nocturnal enuresis. Following the February 2005
summary judgment ruling by the U.S. District Court for the Southern District of New York
ruling that the patent alleged to cover DDAVP is unenforceable and not infringed by our
product, we launched Desmopressin Acetate tablets, 0.1 mg and 0.2 mg, on July 5, 2005. The
courts decision ended the 30-month stay on FDA approval of our product. In February 2006,
the Federal Circuit Court affirmed the District Courts ruling that the patent at issue is
unenforceable. |
|
|
|
|
Modafinil. Modafinil is the generic equivalent of Cephalons PROVIGIL®. In
February 2006, we entered into an agreement with Cephalon to settle our pending patent
infringement dispute in the United States related to PROVIGIL. Under the terms of the
settlement, Cephalon granted us a non-exclusive royalty-bearing right to market and sell a
generic version of PROVIGIL in the United States. Our license will become effective in
October 2011, unless Cephalon obtains a pediatric extension for PROVIGIL in which case we
would be permitted entry in April 2012. An earlier entry by Barr may occur based upon the
entry of another generic version of PROVIGIL. |
|
|
|
|
Niacin. Niacin is the generic equivalent of Kos Pharmaceuticals 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 womens healthcare in
the United States using Durameds 103 person 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 |
25
|
|
|
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. |
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 and 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.
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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|
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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. |
|
|
|
|
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.
26
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.
United States Drug Enforcement Agency (DEA)
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.
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% in the case 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 took effect. During fiscal 2006, we finalized negotiated
rebate agreements involving Cenestin and Trexall with numerous Part D sponsors.
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, 2006, we had approximately 2,040 full-time employees. Approximately 85 of our employees
are represented by the USW, Local 4-149 (formerly the Paper, Allied, Chemical and Energy (PACE)),
Local 2149 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.
27
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:
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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; |
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generic manufacturers located in India and in some sections of Europe that have certain
cost advantages over U.S. generic manufacturers, such as Ranbaxy and Dr. Reddys in India,
and Perrigo in Europe; and |
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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. |
The expiration of patents and other market exclusivities on branded products results in
generic competitors, including Barr, entering the marketplace.
Normally, unit prices
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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obtaining patents on next-generation products
reflecting, for example, changes in
formulation, means of delivery or other product improvement modifications; |
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increasing marketing initiatives; |
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launching authorized generic versions of their branded products; |
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using the Citizens Petition process to request amendments to FDA standards; |
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pricing the brand product below the already reduced price of the generic product in
certain formularies in order to maintain a favored reimbursement status; |
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commencing litigation. |
Generic pharmaceutical market conditions have also 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 product development in areas of historical strength or
competitive advantage; |
28
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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.
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 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, 2005 and ends on September 30, 2006, 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.
ITEM 1A. RISK FACTORS
The statements in this section describe the
major risks to our business and should be considered carefully. We provide the following cautionary discussion of risks, uncertainties
and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think
could cause our actual results to differ materially from expected and historical results. Our business, financial condition or
results of operations could be materially adversely affected by any of these risks.
We note these factors for investors as permitted
by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all
such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.
See Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations Forward-Looking Statements.
29
Competition
from other manufacturers of generic drugs affecting our generic products
The success of our generic business is based in part on successfully developing and bringing
to market a steady flow of generic products. We attempt to select our generic products based on the
prospects for limited competition from competing generic companies. We do so because we believe
that the more generic competitors that market the same generic product, the lower the revenue and
profitability we will record for our product. Therefore, if any of our currently marketed products or any
newly launched generic product are subject to additional generic competition from one or more
competing products, our price and market share for the affected generic product could be
dramatically reduced. As a consequence, unless we successfully
replace generic products that are
declining in profitability with new generic products with higher profitability, our business could
be adversely affected.
Our largest single category of generic products is oral contraceptives, which accounted for
approximately $400 million in revenues in fiscal 2006. In addition, we recorded revenues of $90
million or more from each of two other generic products, Desmopressin, and royalties from the sale
of a generic version of Allegra by Teva Pharmaceuticals. Two generic manufacturers have already
launched a competing generic version of Desmopressin, and there are two competing generic Allegra
products in addition to Tevas. We anticipate added competition to Desmopressin and Allegra over
time. In addition, we anticipate increasing competition to our generic oral contraceptives over
time. Unless we can replace the anticipated losses of revenues from these products with revenues
from new products, our revenues and profitability will suffer.
Competition
from other manufacturers of generic drugs affecting our proprietary products
Upon the expiration or loss of patent protection or regulatory exclusivity periods for one of
our branded products, or upon the at-risk launch by a generic manufacturer of a generic version
of one of our branded products, we can lose the major portion of sales of that product in a very
short period, which can adversely affect our business. For example, SEASONALE, our largest selling
proprietary product, generated $100 million in revenues during fiscal 2006. In May 2006 a
competitor received tentative FDA approval for a generic version of SEASONALE and may be eligible
for final approval following the expiration of our regulatory exclusivity on September 5, 2006. If
the competitor launches its product, our revenues and gross profit contributions from SEASONALE
will decline significantly.
Resolving Paragraph IV patent challenges
Our operating results have historically included significant contributions from products that
arise from the success we have had from our patent challenge activities. However, the success we
have had in the past from
30
challenging
branded companies patents, whether through court decisions
that permit us to launch our generic versions of product or through settlements, may not be
repeated in the future due to the following:
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an increase in the number of competitors who pursue patent challenges could make it more
difficult for us to be first to file a Paragraph IV certification on a patent protected
product; |
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a branded companys decision to launch an authorized generic version of the product
will reduce our market share and lower the revenues and gross profits we could have
otherwise earned if an authorized generic were not
launched; |
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claims brought by third parties, including the FTC, various
states Attorneys General
and other third-party payers challenging the legality of our settlement agreements could affect
the way in which we resolve our patent challenges with the brand pharmaceutical companies;
and |
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the efforts of brand companies to use legislative and regulatory tactics to
delay the launch of generic products. |
Impact of At Risk launches
There are situations where we have used our business and legal judgment and decided to market
and sell products, subject to claims of alleged patent infringement, prior to final resolution by
the courts, based upon our belief that such patents are invalid, unenforceable, or would not be
infringed. This is referred to in the pharmaceutical industry as an at risk launch. The risk
involved in doing so can be substantial because if a patent holder
ultimately prevails, the remedies available to such holder include, among other things, damages measured by
the profits lost by the holder which are often significantly higher
than the profits we make from selling the generic version of the product. Should we elect to proceed in this manner we
could face substantial damages if the final court decision is adverse to us. In the case where a
patent holder was able to prove that our infringement was willful, the definition of which is
subjective, such damages may be trebled.
Government Regulation and Managed Care Trends
The trend toward managed healthcare in the U.S., the growth of organizations such as HMOs and
MCOs and legislative proposals to reform healthcare and government insurance programs could
significantly influence the purchase of pharmaceutical products, resulting in lower prices and a
reduction in product demand. Such cost containment measures and healthcare reform could affect our
ability to sell our products and may have a material adverse effect
on us. Additionally, reimbursements to patients may not be
maintained and third-party payers, which place limits on levels of
reimbursement, may reduce the demand for, or negatively affect the price
of, those products and could significantly harm our business. We may also be subject to lawsuits
relating to reimbursement programs that could be costly to defend, divert managements attention
and could have a material adverse effect on our business.
Development and Regulatory Approval
Risks and uncertainties particularly apply to whether or when our products will be approved.
The outcome of the lengthy and complex process of developing new products is inherently uncertain.
For our generic business, much of our product development efforts are focused on developing
products that are difficult to formulate and/or products that require specialized manufacturing
technology. The inability to successfully formulate and pass bioequivalence studies can adversely
affect the timing of when we receive approval for our generic products.
For our proprietary business, regulatory delays, the inability to successfully complete
clinical trials or claims and concerns about safety and efficacy are a few of the factors that
could adversely affect the timing of new
31
proprietary product launches. In addition decisions by
regulatory authorities regarding labeling and other matters could adversely affect the availability
or commercial potential of our products.
There can be no assurance as to whether or when we will receive regulatory approval for new
products.
Product Manufacturing and Marketing
Difficulties or delays in product manufacturing or marketing, including, but not limited to,
the inability to increase production capacity commensurate with demand, or the failure to predict
market demand for, or to gain market acceptance of approved products, including our recent launches
of SEASONIQUE and ENJUVIA, could affect future results.
Dependence on third parties
We rely on third parties to supply us with raw materials, inactive ingredients and other
components for our manufactured products and for certain of our finished goods. In many instances
there is only a single supplier. In addition, we rely on third-party distributors and alliance
partners to provide services for our business, including product development, manufacturing,
warehousing, distribution, customer service support, medical affairs services, clinical studies,
sales and other technical and financial services for certain of our products. Nearly all
third-party suppliers and contractors are subject to FDA, and in some cases DEA, requirements. Our
business on some products are dependent on the regulatory compliance of these third parties, and on
the strength, validity and terms of our various contracts with these third-party manufacturers,
distributors and collaboration partners. Any interruption or failure by these suppliers,
distributors and collaboration partners to meet their obligations pursuant to various agreements or
obligations with us could have a material adverse effect on our business.
In addition, our revenues include amounts we earn
based on sales generated and recorded by Teva Pharmaceuticals for
generic Allegra, and Kos Pharmaceuticals for Niaspan and
Advicor. Any factors that negatively impact the sales of these products could adversely impact our
revenues and profits.
Customer consolidation
Our principal customers are wholesale drug distributors and major retail drug store chains.
These customers comprise a significant part of the distribution network for pharmaceutical products
in the U.S. This distribution network is continuing to undergo significant consolidation marked by
mergers and acquisitions among wholesale distributors and the growth of large retail drug store
chains. This consolidation may result in these groups gaining additional purchasing leverage and
consequently increasing the product pricing pressures facing our business. Additionally, the
emergence of large buying groups representing independent retail pharmacies and the prevalence and
influence of managed care organizations and similar institutions potentially enable those groups to
attempt to extract price discounts on our products. Our net sales and quarterly growth comparisons
may be affected by fluctuations in the buying patterns of major distributors, retail chains and
other trade buyers. These fluctuations may result from seasonality, pricing, wholesaler buying
decisions or other factors.
Cost and Expense Control/Unusual Events
Growth in costs and expenses, changes in product mix and the impact of acquisitions,
divestitures, restructurings, product withdrawals and other unusual events that could result from
evolving business strategies, evaluation of asset realization and organizational restructuring
could create volatility in our results. Such risks and uncertainties include, in particular, the
potentially significant charges to our operating results for items like in-process research and
development charges and transaction costs.
Legal Proceedings
As described in Legal Proceedings in Part I, Item 3 of this Form 10-K, we and certain of our
subsidiaries are involved in various patent, product liability, consumer and commercial litigations
and claims; government investigations; and other legal proceedings that arise from time to time in
the ordinary course of our business.
32
Litigation is inherently unpredictable, and unfavorable
rulings do occur. An unfavorable ruling could include money damages or, in some rare cases, for
which injunctive relief is sought, an injunction prohibiting Barr from manufacturing or selling one
or more products. Although we believe we have substantial defenses in these matters, we could in
the future incur judgments or enter into settlements of claims that could have a material adverse
effect on our results of operations in any particular period.
Availability of product liability insurance
Our business inherently exposes us to claims relating to the use of our products. We sell, and
will continue to sell, pharmaceutical products for which product liability insurance coverage may
not be available, and, accordingly, if we are sued and if adverse judgments are rendered, we may be
subject to claims that are not covered by insurance as well as claims that exceed our policy limits
each of which could adversely impact our results of operations and our financial condition.
Additional products for which we currently have coverage may be excluded in the future. In
addition, product liability coverage for pharmaceutical companies is becoming more expensive
and increasingly difficult to obtain. As a result, we may not be able to obtain the type and amount
of coverage we desire.
Acquisitions
We regularly review potential acquisitions of products and companies complementary to our
business. Acquisitions typically entail many risks including, difficulties in integrating
operations, personnel, technologies and products. If we are not able to successfully integrate our
acquisitions, we may not obtain the advantages that the acquisitions were intended to create, which
may adversely affect our business, results of operations, financial condition and cash flows, our
ability to develop and introduce new products.
Managing rapidly growing operations
We
have grown significantly over the past several years, extending our processes, systems and
people. We have made significant investments in enterprise resource systems and our internal
control processes to help manage this growth. We must also attract, retain and motivate executives
and other key employees, including those in managerial, technical, sales and marketing and support
positions to support our growth. As a result, hiring and retaining qualified executives,
scientists, technical staff, manufacturing personnel, qualified quality and regulatory
professionals and sales representatives are critical to our business and competition for these
people can be intense. If we are unable to hire and retain qualified employees and if we do not
continue to invest in systems and processes to manage our growth, our operations could be adversely
impacted.
Use of estimates and judgments in applying accounting policies
The methods, estimates and judgments we use in applying accounting policies have a significant
impact of our results of operations (see Critical Accounting Policies in Part II, Item 7 of this
Form 10-K). Such methods, estimates and judgments are, by their nature, subject to substantial
risks, uncertainties and assumptions, and factors may arise over time that leads us to change them.
Changes in those methods, estimates and judgments could significantly affect our results of
operations.
Changes in Laws and Accounting Standards
Our future results could be adversely affected by changes in laws and regulations, including
changes in accounting standards, taxation requirements (including tax-rate changes, new tax laws
and revised tax law interpretations), competition laws and environmental laws in the U.S. and other
countries.
Terrorist Activity
Our future results could be adversely affected by changes in business, political and economic
conditions, including the cost and availability of insurance, due to the threat of future terrorist
activity in the U.S. and other parts of the world and related U.S. military action overseas.
33
Potential acquisition of PLIVA d.d.
On August 10,
2006, we initiated a tender offer to purchase 100% of the shares of PLIVA, a
$1.2 billion generic pharmaceutical company headquartered in Zagreb, Croatia. Our tender offer was
for approximately $2.3 billion plus the assumption of approximately $240 million in existing debt
of PLIVA. If we are successful in the tender process, we
will immediately begin the integration of the two companies. There are a number of operational and
financial risks associated with this potential acquisition. The operational risks include, but are
not limited to, the following:
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the necessity of coordinating and consolidating geographically separated
organizations, systems and facilities; |
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the successful integration of our management and personnel with that of PLIVA and
retaining key employees; |
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changes in intellectual property legal protections and remedies, trade regulations
and procedures and actions affecting approval, production, pricing, reimbursement and
marketing of products. |
The
financial risks related to this potential acquisition include, but
are not limited to, the
following:
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our ability to satisfy debt obligations under the $2.8 billion Senior Credit
Facility we entered into to help finance this transaction; |
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the ability of the combined company to meet certain revenue and cost synergy
objectives; |
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charges associated with this
transaction, including the write-off of acquired in-process research and development
costs, additional depreciation and amortization of acquired assets and interest expense
and other financing costs related to the Senior Credit Facility will
negatively impact our net income; |
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our international-based revenues and expenses will be subject to foreign currency
exchange rate fluctuations. |
If management is unable to successfully integrate the operations and manage the financial
risks, the anticipated benefits of this potential acquisition may not be realized.
On
August 9, 2006 a competing offer to acquire PLIVA was
announced. As a result, we may be required to increase our bid. If we
are unsuccessful in acquiring PLIVA, we will incur a significant
charge to operations reflecting costs we have incurred to date
that have been capitalized.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
34
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,
2006 and indicates the location and principal use of each of these facilities:
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Square |
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Location |
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Footage |
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Status |
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Description |
NEW JERSEY |
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Woodcliff Lake
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90,000 |
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Leased
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Administrative Offices |
Upper Saddle River
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20,000 |
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Leased
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Administrative Offices |
Northvale
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27,500 |
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Owned
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Research and Development |
Plainsboro
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27,000 |
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Leased
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Research and Development, Administration |
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NEW YORK |
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Pomona 1
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41,000 |
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Owned
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Research and Development, Laboratories, |
Pomona 2 and 3
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133,000 |
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Owned
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Laboratories, Administrative Offices,
Manufacturing, Warehouse |
Blauvelt
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8,500 |
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Leased
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Warehouse |
North Tonawanda
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23,500 |
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Leased
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Manufacturing |
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OHIO |
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Cincinnati |
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305,000 |
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Owned
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|
Manufacturing, Laboratories,
Packaging, Warehouse, Administrative Offices |
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PENNSYLVANIA |
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Bala Cynwyd
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39,000 |
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Leased
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|
Proprietary Research,
Administrative Offices |
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VIRGINIA |
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Forest Main Facility
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355,000 |
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Owned
|
|
Administrative Offices,
Manufacturing, Warehouse, Packaging, Distribution, Laboratories, |
Forest Adeno Facility
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20,000 |
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Owned
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Adenovirus Manufacturing Facility |
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|
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WASHINGTON D.C. |
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2,700 |
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Leased
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Government Affairs &
Administrative Offices |
Over the past three fiscal years, we have spent approximately $163 million on capital
expenditures including approximately $112 million 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.
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ITEM 3. LEGAL PROCEEDINGS
Litigation Settlement
On October 22, 1999, we 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 million made to Schein in 1999. An
additional $15 million payment is required under the terms of the settlement if Cenestin achieves
total profits, as defined, of greater than $100 million over any rolling five-year period prior to
October 22, 2014. As of June 30, 2006, no liability is estimated to be incurred related to this
settlement.
Litigation Matters
We are involved in various legal proceedings incidental to our business, including product
liability, intellectual property and other commercial litigation and antitrust actions. We record
accruals for such contingencies to the extent that we conclude a loss is probable and the amount
can be reasonably estimated. Additionally, we record insurance receivable amounts from third party
insurers when appropriate.
Many claims involve highly complex issues relating to patent rights, 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. Our assessments are based on estimates that we, in consultation with
outside advisors, believe are reasonable. Although we believe we have substantial defenses in these
matters, litigation is inherently unpredictable. Consequently, we could in the future incur
judgments or enter into settlements that could have a material adverse effect on our consolidated
financial statements in a particular period.
Summarized below are the more significant matters pending to which we are a party. As of June
30, 2006, our reserve for the liability associated with claims or related defense costs for these
matters is not material.
Patent Matters
Desmopressin Acetate Suit
In July 2002, we filed an ANDA seeking approval from the FDA to market desmopressin acetate
tablets, the generic equivalent of Sanofi-Aventis DDAVP product. We notified Ferring AB, the
patent holder, and Sanofi-Aventis pursuant to the provisions of the Hatch-Waxman Act in October
2002. Ferring AB and Sanofi-Aventis filed a suit in the U.S. 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 us from marketing desmopressin
acetate tablets until the patent expires in 2008. In January 2003, we filed an answer and
counterclaim asserting non-infringement and invalidity of all four listed patents. In January
2004, Ferring AB amended their complaint to add a claim of willful infringement.
On February 7, 2005, the court granted summary judgment in our favor, which Ferring AB and
Sanofi-Aventis appealed. On July 5, 2005, we launched our generic product. On February 15, 2006,
the Court of Appeals for the Federal Circuit denied their appeal. Ferring AB and Sanofi-Aventis
subsequently filed a petition for rehearing and rehearing en banc, which was denied on April 10,
2006. On June 15, 2006, the United States Supreme Court granted Ferring AB leave to file a
petition for a writ of certiorari on or before September 9, 2006.
Fexofenadine Hydrochloride Suit
In June 2001, we filed an ANDA seeking approval from the FDA to market fexofenadine
hydrochloride tablets in 30 mg, 60 mg and 180 mg strengths, the generic equivalent of
Sanofi-Aventis Allegra® tablet products for allergy relief. We notified Sanofi-Aventis pursuant to
the provisions of the Hatch-Waxman Act and, in September 2001, Sanofi-Aventis filed a patent
infringement action in the U.S. District Court for the District of New Jersey-
36
Newark Division, seeking to prevent us from marketing this product until after the expiration
of various U.S. patents, the last of which is alleged to expire in 2017.
After the filing of our ANDAs, Sanofi-Aventis listed an additional patent on Allegra in the
Orange Book. We filed appropriate amendments to our ANDAs to address the newly listed patent and,
in November 2002, notified Merrell Pharmaceuticals, Inc., the patent holder, and Sanofi-Aventis
pursuant to the provisions of the Hatch-Waxman Act. Sanofi-Aventis filed an amended complaint in
November 2002 claiming that our ANDAs infringe the newly listed patent.
On March 5, 2004, Sanofi-Aventis and AMR Technology, Inc., the holder of certain patents
licensed to Sanofi-Aventis, filed an additional patent infringement action in the U.S. District
Court for the District of New Jersey Newark Division, based on two patents that are not listed in
the Orange Book.
In June 2004, the court granted us summary judgment of non-infringement as to two patents. On
March 31, 2005, the court granted us summary judgment of invalidity as to a third patent. Discovery
is proceeding on the five remaining patents at issue in the case. No trial date has been
scheduled.
On August 31, 2005, we received final FDA approval for our fexofenadine tablet products. As
referenced above, pursuant to an agreement between Teva and us, we selectively waived our 180 days
of generic exclusivity in favor of Teva, and Teva launched its generic product on September 1,
2005.
On September 21, 2005, Sanofi-Aventis filed a motion for a preliminary injunction or expedited
trial. The motion asked the court to enjoin Teva and Barr from marketing the generic versions of
Allegra tablets, 30 mg, 60 mg and 180 mg, or to expedite the trial in the case. The motion also
asked the court to enjoin Ranbaxy Laboratories, Ltd. and Amino Chemicals, Ltd. from the commercial
production of generic fexofenadine raw material. The preliminary injunction hearing concluded on
November 3, 2005. On January 30, 2006, the Court denied the motion by Sanofi-Aventis for a
preliminary injunction or expedited trial. Sanofi-Aventis has appealed the Courts denial of its
motion to the United States Court of Appeals for the Federal Circuit. Briefing in the appeal has
been completed, but no date for argument has been set.
On May 8, 2006, Sanofi-Aventis and AMR Technology, Inc. served a Second Amended and
Supplemental Complaint based on U.S. Patent Nos. 5,581,011 and 5,750,703 (collectively, the API
patents), asserting claims against us for infringement of the API (active pharmaceutical
ingredient) patents based on the sale of our fexofenadine product and for inducement of
infringement of the API patents based on the sale of Tevas fexofenadine product. On June 22, 2006,
we answered the complaint, denied the allegations, and asserted counterclaims for declaratory
judgment that the asserted patents are invalid and/or not infringed and for damages for violations
of the Sherman Act, 15 U.S.C. §§ 1,2.
Sanofi-Aventis also has brought a patent infringement suit against Teva in Israel, seeking to
have Teva enjoined from manufacturing generic versions of Allegra tablets and is seeking damages
for patent infringement.
Our agreement with Teva 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 Tevas net profits. If Barr or Teva is
unsuccessful in this litigation with Sanofi-Aventis, we, along with Teva could be liable for
Sanofi-Aventis lost profits on the sale of Allegra, which could potentially exceed the profits
Teva and Barr have realized from the sale of generic Allegra. The Company, in accordance with FASB
Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, recorded a liability of approximately $4.1 million
to reflect the fair value of this potential indemnification obligation.
37
Product Liability Matters
Hormone Therapy Litigation
We have been named as a defendant in approximately 4,950 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 us involve our Cenestin products and/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 a defendant 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 our product. For that reason, approximately 3,100 of such cases have
been dismissed (leaving approximately 1,850 pending) and, based on discussions with our outside
counsel, several hundred more are expected to be dismissed in the near future.
We believe we have viable defenses to the allegations in the complaints and we are defending
the actions vigorously.
Antitrust Matters
Ciprofloxacin (Cipro®) Antitrust Class Actions
We have been named as a co-defendant with Bayer Corporation, The Rugby Group, Inc. and others
in approximately 38 class action complaints filed in state and federal courts by direct and
indirect purchasers of Ciprofloxacin (Cipro) from 1997 to the present. The complaints allege that
the 1997 Bayer-Barr patent litigation settlement agreement was anti-competitive and violated
federal antitrust laws and/or state antitrust and consumer protection laws. A prior investigation
of this agreement by the Texas Attorney Generals Office on behalf of a group of state Attorneys
General was closed without further action in December 2001.
The lawsuits include nine consolidated in California state court, one in Kansas state court,
one in Wisconsin state court, one in Florida state court, and two consolidated in New York state
court, with the remainder of the actions pending in the U.S. 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 U.S.
Court of Appeals for the Second Circuit. The Court of Appeals has stayed consideration of the
merits pending consideration of our motion to transfer the appeal to the United States Court of
Appeals for the Federal Circuit as well as plaintiffs request for the appeal to be considered en
banc. Merits briefing has not yet been completed because the proceedings are stayed pending en banc
consideration of a similar case.
On September 19, 2003, the Circuit Court for the County of Milwaukee dismissed the Wisconsin
state class action for failure to state a claim for relief under Wisconsin law. On May 9, 2006, the
Court of Appeals reinstated the complaint on state law grounds for further proceedings in the trial
court, but on July 25, 2006, the Wisconsin Supreme Court granted the defendants petition for
further review and thus the case remains on appeal. 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. An intermediate appellate court affirmed that decision, and plaintiffs have
sought leave to appeal to the New York Court of Appeals. 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 ourself in these matters.
Tamoxifen Antitrust Class Actions
To
date approximately 33 consumer or third-party payor class action complaints have been filed
in state and federal courts against Zeneca, Inc., AstraZeneca Pharmaceuticals L.P. and Barr
alleging, among other things, that
38
the 1993 settlement of patent litigation
between Zeneca and us
violated the antitrust laws, insulated Zeneca and Barr from generic competition and enabled Zeneca
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. On May 19, 2003, the U.S. District Court dismissed the complaints for failure to
state a viable antitrust claim. On November 2, 2005, the United States Court of Appeals for the
Second Circuit affirmed the District Courts order dismissing the cases for failure to state a
viable antitrust claim. On November 30, 2005, Plaintiffs petitioned the United States Court of
Appeals for the Second Circuit for a rehearing en banc. The Court of Appeals directed us to file a
response to Plaintiffs petition, which we submitted on January 26, 2006. The Court has not yet
ruled on the merits of the petition.
We
believe that our agreement with Zeneca 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
these matters.
Ovcon Antitrust Proceedings
To
date, we have been named as a co-defendant with Warner Chilcott Holdings, Co. III, Ltd.,
and others in complaints filed in federal courts by the Federal Trade Commission, 34 state
Attorneys General and nine private class action plaintiffs claiming to be direct and indirect
purchasers of Ovcon-35®. These actions allege, among other things, that a March 24, 2004 agreement
between Barr and Warner Chilcott (then known as Galen Holdings PLC) constitutes an unfair method of
competition, is anticompetitive and restrains trade in the market for
Ovcon-35® and its generic
equivalents. These cases, the first of which was filed by the FTC on or about December 2, 2005,
remain at a very early stage, with discovery cut-off dates of December 22, 2006 for the FTC and
state cases and March 2, 2007 for the private cases. No trial dates have been set.
We believe that we have not engaged in any improper conduct and are vigorously defending these
matters.
Provigil Antitrust Proceedings
To date, we have been named as a co-defendant with Cephalon, Inc., Mylan Laboratories, Inc.,
Teva Pharmaceutical Industries, Ltd., Teva Pharmaceuticals USA, Inc., Ranbaxy Laboratories, Ltd.,
and Ranbaxy Pharmaceuticals, Inc. (the Provigil Defendants) in nine separate complaints filed in
the U. S. District Court for the Eastern District of Pennsylvania. These actions allege, among
other things, that the agreements between Cephalon and the other individual Provigil Defendants to
settle patent litigation relating to Provigil® constitute an unfair method of competition, are
anticompetitive and restrain trade in the market for Provigil and its generic equivalents in
violation of the antitrust laws. These cases remain at a very early stage and no trial dates have
been set.
We were
also named as a co-defendant with the Provigil Defendants in an action filed in the U.S. District Court for the Eastern District of Pennsylvania by Apotex, Inc.. The lawsuit alleges,
among other things, that Apotex sought to market its own generic
version of Provigil and
that the settlement agreements entered into between Cephalon and the other individual Provigil
Defendants constituted an unfair method of competition, are anticompetitive and restrain trade in
the market for Provigil and its generic equivalents in violation of the antitrust laws.
We believe that we have not engaged in any improper conduct and are vigorously defending these
matters.
Medicaid Reimbursement Cases
We, along with numerous other pharmaceutical companies, have been named as a defendant in
separate actions brought by the states of Alabama, Hawaii, Illinois, Kentucky and Mississippi, the
Commonwealth of Massachusetts, the City of New York, and numerous counties in New York. 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 Commonwealth
of Massachusetts case and the New York cases, with the exception of the
action filed by Erie, Oswego and Schenectady Counties in New York, are currently pending in the U.S.
District Court for the
39
District of Massachusetts. Discovery is underway in the Massachusetts cases,
but no trial dates have been set. In the consolidated New York cases, motions to dismiss are under
advisement, with no trial dates set. The Erie, Oswego and Schenectady County cases are pending in
state courts in New York, again with no trial dates set.
The Alabama case was filed in Alabama state court, removed to the U.S. District Court for the
Middle District of Alabama, and returned to state court. Discovery is underway, but no trial date
has been set. The State of Hawaii case was filed in state court in Hawaii on April 26, 2006. This
matter is at a very early stage with no trial date set as of yet. The Illinois and Kentucky cases
were filed in Illinois and Kentucky state courts, removed to federal court, and then remanded back
to their respective state courts. No trial dates have been set. The State of Mississippi case was
filed in state court. Discovery is underway, but no trial date has been set.
We believe that we have not engaged in any improper conduct and are vigorously defending these
matters.
Breach of Contract Action
On October 6, 2005, plaintiffs Agvar Chemicals Inc., Ranbaxy Laboratories, Inc. and Ranbaxy
Pharmaceuticals, Inc. filed suit against us and Teva Pharmaceuticals USA, Inc. in the Superior
Court of New Jersey. In their complaint, plaintiffs seek to recover damages and other relief, based
on an alleged breach of an alleged contract requiring us to purchase raw material for our generic
Allegra product from Ranbaxy, prohibiting us from launching our generic Allegra product without
Ranbaxys consent and prohibiting us from entering into an agreement authorizing Teva to launch
Tevas generic Allegra product. The court has entered a scheduling order providing for the
completion of discovery by March 7, 2007 but has not yet set a date for trial. We believe there was
no such contract and are vigorously defending this matter.
Other Litigation
As of June 30, 2006, we were involved with other lawsuits incidental to our 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 other matters
will not have a material adverse effect on our consolidated financial statements.
Government Inquiries
On July 11, 2006, we received a request from the FTC for the voluntary submission of
information regarding the settlement agreement reached in the matter of Cephalon, Inc. v. Mylan
Pharmaceuticals, Inc., et al., U.S. District Court for the District of New Jersey. The FTC is
investigating whether we and the other parties to the litigation have engaged in unfair methods of
competition in violation of Section 5 of the Federal Trade Commission Act by restricting the sale
of Modafinil products. In its request letter, the FTC stated that neither the request nor the
existence of an investigation indicated that Barr or any other company had violated the law. We
believe that our settlement agreement is in compliance with all applicable laws and we intend to
cooperate with the FTC in this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters put to the vote of our stockholders during the quarter ended June 30,
2006.
40
PART II
|
|
|
ITEM 5. |
MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |
(a) Market for Barrs Common Equity
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:
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Fiscal year ended June 30, 2006: |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
55.08 |
|
|
$ |
45.00 |
|
Second quarter |
|
|
63.60 |
|
|
|
53.53 |
|
Third quarter |
|
|
70.25 |
|
|
|
60.83 |
|
Fourth quarter |
|
|
64.51 |
|
|
|
47.24 |
|
|
|
|
|
|
|
|
|
|
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 |
|
As of August 4, 2006, we estimate that there were approximately 1,520 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.
(b) Recent Sales of Unregistered Securities
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.
(c) Issuer Purchases of Equity Securities
We did not repurchase any shares under our share repurchase program during the quarter ended
June 30, 2006. Our share repurchase program is authorized through December 31, 2006.
41
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, and
Managements Discussion and Analysis of Financial Condition and Results of Operations included in
Item 7 of this report. Certain amounts for fiscal 2005 have been reclassified to conform
to the fiscal 2006 presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
(in thousands, except per share data) |
Statements of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,314,465 |
|
|
$ |
1,047,399 |
|
|
$ |
1,309,088 |
|
|
$ |
902,864 |
|
|
$ |
1,188,984 |
|
Earnings before income taxes |
|
|
522,948 |
|
|
|
329,876 |
|
|
|
194,440 |
|
|
|
262,715 |
|
|
|
337,537 |
|
Income tax expense |
|
|
186,471 |
|
|
|
114,888 |
|
|
|
71,337 |
|
|
|
95,149 |
|
|
|
125,318 |
|
Net earnings |
|
|
336,477 |
|
|
|
214,988 |
|
|
|
123,103 |
|
|
|
167,566 |
|
|
|
210,269 |
|
Earnings per common share basic |
|
|
3.20 |
|
|
|
2.08 |
|
|
|
1.21 |
|
|
|
1.69 |
(2) |
|
|
2.17 |
(2)(3) |
Earnings per common share diluted |
|
|
3.12 |
|
|
|
2.03 |
|
|
|
1.15 |
|
|
|
1.62 |
(2) |
|
|
2.06 |
(2)(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
921,663 |
|
|
$ |
780,386 |
|
|
$ |
670,601 |
|
|
$ |
582,183 |
|
|
$ |
457,393 |
|
Total assets |
|
|
1,921,419 |
|
|
|
1,490,306 |
|
|
|
1,333,269 |
|
|
|
1,180,937 |
|
|
|
888,554 |
|
Long-term debt (1) |
|
|
7,431 |
|
|
|
15,493 |
|
|
|
32,355 |
|
|
|
34,027 |
|
|
|
42,634 |
|
Shareholders
equity (4) |
|
|
1,690,956 |
|
|
|
1,233,970 |
|
|
|
1,042,046 |
|
|
|
867,995 |
|
|
|
666,532 |
|
|
|
|
(1) |
|
Includes capital leases and excludes current installments. |
|
(2) |
|
Amounts have been adjusted for the March 16, 2004 3-for-2 stock split effected in the form of
a 50% stock dividend. |
|
(3) |
|
Amounts have been adjusted for the March 17, 2003 3-for-2 stock split effected in the form of
a 50% stock dividend. |
|
(4) |
|
The Company has not paid a cash dividend in any of the above
years. |
42
ITEM 7. MANAGEMENTS 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 recently diversified our operations by developing and acquiring several
proprietary products. Total product sales for fiscal 2006 totaled
approximately $1.2 billion, an increase of
$138.5 million, or 13% as compared to fiscal 2005. In fiscal 2006, sales of generic products grew
to $838.8 million from $751.4 million in fiscal 2005, and
accounted for 72% of our product sales in fiscal 2006.
In fiscal 2006, sales of our proprietary products grew to $329.8 million from $278.8 million in
fiscal 2005, accounting for 28% of our product sales in fiscal 2006. In addition to revenue from
product sales, we recorded alliance, development of other revenues totaling $145.8 million in
fiscal 2006. These revenues have been derived mainly from profit-sharing arrangements, co-promotion
agreements, standby manufacturing fees and other reimbursements and fees we received from third
parties, including marketing partners.
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 it may be
difficult to find highly profitable generic tablet and capsule products that will grow our generics
business. As a result, we have recently expanded our development activities, both internally and
through collaboration with third parties, to develop non-tablet and non-capsule products such as
patches, sterile ophthalmics and nasal sprays.
Challenging
the patents covering certain brand products continues to be an integral part of
our generics business. 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. Upon receiving exclusivity for a product, we often experience
significant revenues and profitability associated with that product for the 180-day 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. Our record of
successfully resolving patent challenges has made a recurring contribution to our operating
results, 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 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 46.5% in 2000 to 57.3% by 2005, and is
predicted to continue to rise in the future.
43
Proprietary Products
To help diversify our generic product 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, Duramed is recognized as a leader in the area of womens healthcare. Our womens healthcare
platform is based on a substantial number of employees dedicated to the development and marketing
of our proprietary products including approximately 350 sales representatives that promote directly
to physicians five of our products (SEASONIQUE, ENJUVIA, Mircette, ParaGard and Plan B) and two
products related to the Co-Promotion Agreement with Kos
Pharmaceuticals (Niaspan and Advicor). Growth in proprietary
product sales over the last three fiscal years has been accomplished
through increasing sales of our
internally developed product SEASONALE, the first and largest selling extended-cycle oral
contraceptive in the United States. In addition, our proprietary sales have grown through product
acquisitions including our acquisition in November, 2005 of ParaGard, the only non-drug loaded IUD
on the market in the United States, and the acquisition in December 2005 of Mircette, a well
established 28-day oral contraceptive.
Competition
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 are 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 the 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 Barr and other U.S. based generic competitors.
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 a competing generic product on
the market at the same time.
As our proprietary pharmaceutical business continues to grow, we anticipate that competing
generic pharmaceutical companies will challenge the patents protecting our branded products. For
example, as discussed above, one of our competitors has filed a Paragraph IV certification
challenging the patent on SEASONALE. In May 2006, the competitors ANDA received tentative FDA
approval and may be eligible for final approval following the expiration of our regulatory
exclusivity on September 5, 2006. In addition, larger branded pharmaceutical companies, such as
Wyeth, have sought to enter the extended-cycle oral contraceptive market and compete against our
SEASONALE/SEASONIQUE franchise.
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.
Proposed
PLIVA Acquisition
On
June 27, 2006, we announced that the Supervisory Board of PLIVA, a generic
pharmaceuticals company with revenues of approximately
$1.2 billion, headquartered in Zagreb, Croatia, had endorsed our proposal to make a tender offer
to PLIVAs shareholders to purchase 100% of the shares of PLIVA. On July 28, 2006, in accordance
with the law of the Republic of Croatia governing tender offers, our newly formed European
subsidiary, Barr Laboratories Europe B.V., officially filed our tender offer with HANFA. Under the
terms of the $2.3 billion cash tender offer, PLIVA shareholders who
44
tender their shares will
receive HRK 743 per share in cash. In addition, shareholders that are registered as
shareholders at the Central Depository Agency as of August 22, 2006 will receive the dividend
of HRK 12 per share, for a total cash consideration of HRK 755 per
share. On August 10, 2006, HANFA approved for publication our tender offer. If we are successful in
the tender process we expect the acquisition to close in October or November 2006.
On August 9, 2006, another pharmaceutical company filed a competing bid with HANFA,
though that bid had not been approved as of the date of this filing.
If
we acquire PLIVA, the combined company would be the third
largest global generic pharmaceutical company, based on the combined revenues of approximately $2.4
billion revenue for the twelve-month period ended March 31, 2006. We believe that the combination of Barr
and PLIVA will unite the unique pharmaceutical development and manufacturing strengths of each
partner, the unique markets in which each excels, and the expertise of a U.S.-based and
European-based management team to create a powerful, global pharmaceutical leader with a broad
portfolio of solid oral dosage form products with the ability to create a broad portfolio of
injectable, cream/ointment, and biopharmaceutical products. In addition, the combined company will
have active pharmaceutical ingredient (API) capabilities. The combination would also provide a
solid foundation for accelerating the development of generic biopharmaceutical products, building
upon PLIVAs biologic research program and the existing development venture between PLIVA and Barr
for G-CSF in North America, which we entered into in March 2005.
We intend to finance the purchase price and transaction costs with a portion of our cash
reserves and borrowings under a new Senior Credit Facility that we entered into on July 21, 2006.
The Senior Credit Facility consists of $2.5 billion of term loans and a $300 million revolving
credit facility.
45
Comparison of the fiscal years ended June 30, 2006 and June 30, 2005
The following table sets forth revenue data for the fiscal years ended June 30, 2006 and 2005
($s in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Generic products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oral contraceptives |
|
$ |
399.4 |
|
|
$ |
396.6 |
|
|
$ |
2.8 |
|
|
|
1 |
% |
Other generic |
|
|
439.4 |
|
|
|
354.8 |
|
|
|
84.6 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total generic products |
|
|
838.8 |
|
|
|
751.4 |
|
|
|
87.4 |
|
|
|
12 |
% |
Proprietary products |
|
|
329.8 |
|
|
|
278.8 |
|
|
|
51.0 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product sales |
|
|
1,168.6 |
|
|
|
1,030.2 |
|
|
|
138.4 |
|
|
|
13 |
% |
Alliance, development and other revenue |
|
|
145.8 |
|
|
|
17.2 |
|
|
|
128.6 |
|
|
|
748 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,314.4 |
|
|
$ |
1,047.4 |
|
|
$ |
267.0 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Sales
Product sales for the fiscal year ended June 30, 2006 (fiscal 2006) increased 13% over
product sales for the fiscal year ended June 30, 2005 (fiscal 2005), resulting from increases in
sales of both generic and proprietary products. Generic sales increased in large part due to
contributions from Desmopressin, which we launched at the beginning of fiscal 2006, combined with
continued strong sales of two of our generic oral contraceptive products, Tri-Sprintec and Kariva.
Proprietary sales increased in part due to contributions of products acquired during fiscal 2006 as
well as higher sales of promoted in-line products, including SEASONALE and Plan B.
Generic Products
Oral Contraceptives
For fiscal 2006, sales of generic oral contraceptives increased 1% to $399.4 million from
sales of $396.6 million in fiscal 2005. Sales in this category benefited from strong performances
from Tri-Sprintec and Kariva. Tri-Sprintec sales increased 20%, driven in part by market-share
gains during the second half of fiscal 2006, while sales of Kariva were up 32% due both to an
increase in market share and higher pricing. We believe that Tri-Sprintecs market share gains were
the result of supply shortages encountered by one of our competitors, which we understand have been
remedied. Therefore, we expect our Tri-Sprintec market share to decline over the next twelve
months, with a related decrease in our product sales attributable to Tri-Sprintec.
Somewhat offsetting the strong performances by Tri-Sprintec and Kariva was the impact of
increased pricing pressure from competition on certain of our other products, including
Aviane and Apri, as well as the ongoing decline in consumer demand for several generic oral
contraceptive products that occurs when brand companies cease promotional activities after a
generic is launched. These factors more than offset continued increases in the generic substitution
rates for nearly all of our generic oral contraceptive products.
Generic Products Other
For fiscal 2006, sales of other generic products increased 24% to $439.4 million from $354.8
million in fiscal 2005, driven by strong performances from Desmopressin and Didanosine. We launched
Desmopressin in July 2005, and recorded approximately $107.7 million of sales during fiscal 2006.
We launched Didanosine during the middle of fiscal 2005, and saw sales increase 47% year-over-year.
Desmopressin sales, which were favorably impacted in the first half of fiscal 2006 by rapid generic
substitution, declined sharply in the second half due to the launch of two competing generic
products. We expect Desmopressin sales to be lower in the next twelve months as a result of this
competition.
46
These increases were partially offset by lower sales of Mirtazapine, Claravis and Warfarin
Sodium, as well as the continued decline in both price and demand for certain of our other generic
products. Mirtazapine sales were lower due to further price declines and a loss of market share.
Claravis sales were lower throughout fiscal 2006 due in large part to the decline in the overall
compound usage and lower prices. As discussed in previous filings, sales of Claravis and other
isotrentinoin products indicated for the treatment of severe acne have been negatively affected by
the implementation effective January 1, 2006 of iPledge, an enhanced risk management program that
is designed to minimize fetal exposure to isotrentinoin that has also led to reduced product use.
Sales of Warfarin Sodium declined due to lower prices, more than offsetting higher unit volume due
primarily to an increase in our market share.
Proprietary Products
For fiscal 2006, proprietary product sales increased 18% to $329.8 million from $278.8 million
in fiscal 2005. This increase was driven by (1) 14% increase in sales of SEASONALE, (2) the
inclusion of sales of the ParaGard IUD and of the Mircette oral contraceptive, which we acquired in
November 2005 and December 2005, respectively, (3) the launch of ENJUVIA during the fourth quarter
of 2006 and (4) higher volume and pricing for our Plan B emergency contraceptive product. Partially
offsetting these increases were lower sales of our Loestrin/Loestrin FE oral contraceptive products
and our Cenestin hormone therapy product, due in part to customer buying patterns.
SEASONALE sales reached $100 million during fiscal 2006, up 14% from fiscal 2005 sales. Higher
prices for SEASONALE during fiscal 2006 more than offset lower customer shipments which were
attributable to customer buying patterns during the fourth quarter of fiscal 2006. During fiscal
2006, consumer demand for SEASONALE grew, as prescriptions increased 30% compared to last year.
In June 2004, we received notification that a competitor had filed an ANDA containing a
paragraph IV certification asserting that the patent covering SEASONALE is invalid, unenforceable
or would not be infringed by the competitors generic product. In May 2006, the competitors ANDA
received tentative FDA approval and may be eligible for final approval following the expiration of
our regulatory exclusivity on September 5, 2006. In July 2006, we submitted a Citizens Petition,
asking the Office of Generic Drugs of the FDA to make the determination that no ANDA submitted
referencing our NDA for SEASONALE be granted final approval unless and until such ANDA satisfies
all statutory and regulatory requirements for bioequivalence. Our request with the Office of
Generic Drugs is pending. The competitor has stated publicly that it expects to launch a generic
version of SEASONALE in the fourth quarter of calendar 2006. If that launch occurs, SEASONALE
sales will decline significantly.
In July 2004, we submitted the patent covering SEASONALE for reissue with the Patent and
Trademark Office (PTO). In May 2006, we received a Non-Final Rejection notice from PTO regarding
our application for reissue of the patent. In July 2006, we responded to the issues raised by the
PTO in its Non-Final Rejection. It is unlikely that the applicable patent could be reissued prior
to expiration of our regulatory exclusivity on SEASONALE. The patent covering SEASONALE will remain
in effect and continue to be listed in the FDAs Orange Book while the PTO reviews the request for
re-issuance. If the patent covering SEASONALE is reissued, it will have the same remaining term as
the existing patent that expires in 2017.
As part of our long-term plans for our extended-cycle contraceptive franchise, we launched
SEASONIQUE in July 2006. SEASONIQUE represents the next generation of our extended-cycle oral
contraceptives, as discussed earlier in this report. In July 2006, we shipped SEASONIQUE to our
major customers, and in August 2006, Durameds Womens Healthcare Sales Force began full-scale detailing
to healthcare providers. SEASONIQUE has replaced SEASONALE in the primary sale position among
extended-cycle oral contraceptives within our Womens Healthcare Sales Force.
Alliance, Development and Other Revenue
Alliance, development and other revenue consists mainly of revenue from profit-sharing
arrangements, co-promotion agreements, standby manufacturing fees and reimbursements and fees we
receive in conjunction with our agreement with the U.S. Department of Defense for the development
of the Adenovirus vaccine. Alliance, development and other revenue increased substantially from the
prior year primarily due to (1) our profit-sharing
47
arrangement with Teva on sales of their generic Allegra product and (2) royalty payments and
other fees under our agreements with Kos on Niaspan and Advicor.
During fiscal 2006, alliance, development and other revenue totaled $145.8 million compared to
$17.2 million in the prior year. The substantial increase was driven by our profit sharing
arrangement with Teva, which began in September 2005 and represented 65% of such revenues in fiscal
2006, and an increase in royalties under our agreements with Kos, under which we began earning
royalties in the fourth quarter of fiscal 2005.
Tevas 180-day exclusivity period on generic Allegra ended on February 28, 2006. By the end of
June 2006, there were two additional competing generic Allegra products on the market. We are aware
of several other companies that have filed ANDAs with Paragraph IV certifications for generic
Allegra. Competition for generic Allegra has and will continue to cause Tevas Allegra revenues
to decrease. Accordingly, our royalties are expected to decline.
Additionally, our royalty percentage decreased following the expiration of the exclusivity
period on February 28, 2006, further reducing the amount we earn. As a result of these factors, our
royalties from our profit-sharing arrangement with Teva are expected to decrease substantially over
the next twelve months.
Royalties we earn under our co-promotion agreement with Kos are based on the aggregate sales
of Niaspan and Advicor in a given quarter and calendar year, up to quarterly and annual maximum
amounts. While the annual cap increases each year during the term of our arrangement, which ends
July 2012, unless extended by either party for an additional year, the royalty rate will decline
for calendar 2007, after which the rate remains fixed throughout the remaining term of the
agreement. Due to the annual cap for calendar 2006, we expect our royalties earned during the
second half of calendar 2006 to be lower than in the first half of calendar 2006.
Cost of Sales
Amounts that comprise cost of sales include (1) the cost of products we purchase from third
parties, (2) our manufacturing and packaging costs for products we manufacture, (3) profit-sharing
or royalty payments we make to third parties, including raw material suppliers, (4) changes to our
inventory reserves and (5) stock-based compensation expense of certain departments that is
allocated to cost of sales. Amortization costs arising from the acquisition of product rights and
other intangible assets are included in selling, general and administrative expense.
The following table sets forth cost of sales data, in dollars, as well as the resulting gross
margins expressed as a percentage of product sales, for fiscal 2006
and 2005 ($s in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Generic products |
|
$ |
285.9 |
|
|
$ |
264.8 |
|
|
$ |
21.1 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
66 |
% |
|
|
65 |
% |
|
|
|
|
|
|
|
|
|
Proprietary products |
|
$ |
66.2 |
|
|
$ |
39.3 |
|
|
$ |
26.9 |
|
|
|
68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
80 |
% |
|
|
86 |
% |
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
$ |
352.1 |
|
|
$ |
304.1 |
|
|
$ |
48.0 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
70 |
% |
|
|
70 |
% |
|
|
|
|
|
|
|
|
Overall gross margins for fiscal 2006 remained strong at 70%. Cost of sales increased 16%
year-over-year primarily due to (1) the inclusion of $8.1 million of stock-based compensation
expense that was not present in fiscal 2005 and (2) $20.7 million of charges to write off the
step-up to fair value of ParaGard inventory acquired from FEI in November 2005. As of June 30,
2006, the entire amount of the step-up adjustment had been charged to cost of sales as the units
acquired on the date of acquisition have been sold.
Margins on our generic products increased slightly in fiscal 2006 due to strong sales of
Desmopressin and Didanosine, both of which had higher margins than the average margin of our other
generic products. The margin
48
increase related to these products was slightly offset by the first-time inclusion of
stock-based compensation expense in cost of sales. We expect that the margins we realize on
Desmopressin will decline in the future due to the impact of
competing products. This decline may more than
offset margins on new generic products we expect to launch, which
could result in lower overall margins on our generic products over
the next twelve months.
Proprietary margins for the year ended June 30, 2006 were negatively impacted by 6 percentage
points due primarily to the $20.7 million inventory step-up charge described above, and the
inclusion of stock-based compensation expense. We expect gross margins for proprietary products to
be above 80% over the next few quarters, in part due to the favorable impact resulting from
launches of SEASONIQUE and ENJUVIA somewhat offset by the expected decline in sales of SEASONALE.
Selling, General and Administrative Expense
The following table sets forth selling, general and administrative expense data for fiscal
2006 and 2005 ($s in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Selling, general and administrative |
|
$ |
334.8 |
|
|
$ |
298.9 |
|
|
$ |
35.9 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges included in general and administrative |
|
$ |
14.1 |
|
|
$ |
63.2 |
|
|
$ |
(49.1 |
) |
|
|
-78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses increased 12% in fiscal 2006 primarily due to:
(1) $26.4 million in higher selling and marketing costs associated with our proprietary product
portfolio, largely attributable to the launch of ENJUVIA during the fourth quarter and personnel
costs associated with the additional sales representatives acquired in the FEI acquisition, (2)
$13.4 million in stock-based compensation that was not included in the prior year, (3) higher
information technology costs of $12.5 million relating to the integration of our SAP enterprise
resource planning system, (4) a $10.2 million increase in product intangible amortization expense
due to full-year amortization on products purchased in the prior year plus amortization of products
purchased in the current year, principally ParaGard and Mircette, and (5) a $6.5 million increase
in legal costs, which more than offset the charges described below.
Charges included in general and administrative expenses for fiscal 2006 and 2005 are
as follows:
Fiscal 2006:
On December 2, 2005, after receiving the requisite approvals, we entered into a definitive
agreement with Organon and Savient to acquire the exclusive rights to Mircette
for $152.8 million (see fiscal 2005 charges below). Based on final valuations of the assets acquired, we recorded an additional charge in fiscal 2006
of $0.8 million (bringing the total charge to $64 million) for the difference between amounts
recorded as a probable loss at June 30, 2005 and the final loss amount. We also incurred
transaction costs during fiscal 2006 (primarily legal and accounting fees) of $1.8 million.
Additionally, we received $11.0 million from a third party as partial reimbursement of the $64
million charge recorded in conjunction with this transaction. The $11.0 million reimbursement,
together with the additional settlement charge of $0.8 million and the transactions costs of $1.8
million, have all been classified as selling, general and administrative expenses and have resulted
in a net benefit of $8.4 million to selling, general and administrative expenses for fiscal 2006.
In February 1998, Invamed and Apothecon named Barr and several others as defendants in
lawsuits filed in the U.S. District Court for the Southern District of New York, alleging
violations of antitrust laws and also charging that Barr unlawfully blocked access to the raw
material source for Warfarin Sodium. The two actions were consolidated. On May 10, 2002, the
District Court granted summary judgment in Barrs favor on all antitrust claims in the case, but
found that the plaintiffs could proceed to trial on their allegations that Barr interfered with an
alleged raw material supply contract between Invamed and Barrs raw
49
material supplier. Invamed and
Apothecon appealed the District Courts decision to the U. S. Court of Appeals for the Second
Circuit.
On October 18, 2004, the Court of Appeals reversed the District Courts grant of summary
judgment and held that the plaintiffs raised issues of material fact on their antitrust claims. A
trial had been scheduled to begin on June 12, 2006. On
June 12, 2006, we finalized an agreement that
provided a one-time payment of $22.5 million to the plaintiffs. As a result of the settlement, we
recorded a $22.5 million charge in the quarter ended June 30, 2006.
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. Because the transaction included, as one of its components, a payment in settlement of
litigation, it was presumed under GAAP to give rise to a probable loss, as defined in Statement
of Financial Accounting Standards No. 5, Accounting for Contingencies. Based on valuations of the
assets we acquired and total estimated payments, we had recorded a charge of $63.2 million as of
June 30, 2005 to reflect the proposed litigation settlement.
Research and Development
The following table sets forth research and development expenses for fiscal 2006 and 2005
($s in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Research and development |
|
$ |
140.2 |
|
|
$ |
128.4 |
|
|
$ |
11.8 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in research and development expenses costs was due to (1) an increase of $9.5
million in costs associated with clinical trials, (2) the inclusion of $5.6 million of stock-based
compensation that was not similarly included in fiscal 2005 and (3) an increase of $5.6 million in
raw material costs. These increases were offset by a reimbursement of $5.0 million for previously
incurred costs under a third party development agreement and a $4.0 million decrease in costs
associated with bioequivalent studies supporting our generic product activities.
Other
Income (expense)
The
following table sets forth other income for fiscal 2006 and 2005
($s in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Other income (expense) |
|
$ |
17.2 |
|
|
$ |
3.9 |
|
|
$ |
13.3 |
|
|
|
341 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income increased to $17.2 million in fiscal 2006 from $3.9 million in fiscal 2005
primarily as a result of a $10.3 million gain in the value of our foreign currency option related
to the proposed PLIVA acquisition. This gain was the result of fluctuations and volatility in the
exchange rate between the Dollar and the Euro. We expect additional fluctuations in the value of
this option in the future.
Additionally, we recorded a net gain during fiscal 2006 of $5.2 million related to our equity
investment in two venture funds, compared to a loss of $0.8 million during fiscal 2005.
50
Income Taxes
The following table sets forth income tax expense and the resulting effective tax rate stated
as a percentage of pre-tax income for fiscal 2006 and 2005 ($s in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Income tax expense |
|
$ |
186.5 |
|
|
$ |
114.9 |
|
|
$ |
71.6 |
|
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
35.7 |
% |
|
|
34.8 |
% |
|
|
|
|
|
|
|
|
The effective tax rate for fiscal 2006 was slightly higher than the statutory rate of 35%
due to the expiration of the federal research and development tax credit on December 31, 2005,
which was only partially offset by the favorable impact arising from 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.
During fiscal 2006 the IRS completed an audit of our federal income tax return for fiscal
2004. The resolution favorably impacted our effective tax rate for fiscal year 2006 but did not
have a material effect on our financial position or liquidity. Periods prior to fiscal 2004 have
either been audited or are no longer subject to an IRS audit. We are currently being audited by the
IRS for fiscal year 2005.
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 Bayers pediatric exclusivity period
which ended on June 9, 2004. |
|
(2) |
|
Includes sales of Ciprofloxacin after June 9, 2004. |
Revenues Product Sales
Product sales for fiscal 2005 decreased 21% for the fiscal year ended June 30, 2004 (fiscal
2004) due primarily to the decline in sales of Ciprofloxacin, as discussed in detail below.
Partially offsetting the decrease in Ciprofloxacin sales was a 91% increase in sales of our
proprietary products.
51
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 Bayers Ciproâ antibiotic. In September 2003, we entered
into an amended supply agreement with Bayer that enabled us to distribute Ciprofloxacin during and
after Bayers 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 Sanofi-Aventis, the contractual successor to our partner in the Cipro patent challenge case.
Upon expiration of Bayers 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 increased competition 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.
Generic Products Other
Sales of other generic products decreased 2% in fiscal 2005 as compared to fiscal 2004, as
sales from new products, 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.
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 $87.2 million for
the fiscal year, reflecting higher unit sales in support of prescription growth and higher pricing
compared to the prior fiscal year; (2) full year sales of Loestrin/Loestrin Fe and Plan B which we acquired in
February 2004 and March 2004, respectively; and (3) sales of Nordette and Prefest, which we
acquired in November 2004 and December 2004, respectively.
SEASONALE prescriptions, according to IMS data, topped 800,000 for our fiscal year ended June
30, 2005, a 370% increase over prescriptions in the prior fiscal year. This increase is a direct
result of our significant marketing initiatives, including direct-to-consumer advertising and the
detailing efforts by our Womens Healthcare Sales force.
52
Cost of Sales
Product mix plays a significant role in our quarterly and annual overall gross margin
percentage. In the past, our overall gross margins have been negatively impacted by sales of
lower-margin distributed versions of products such as Ciprofloxacin and Tamoxifen, which were
manufactured for us by brand companies and distributed by us under the terms of the respective
patent challenge settlement arrangements.
The following table sets forth cost of sales data in dollars as well as the resulting gross
margins for fiscal 2005 and 2004 ($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 fiscal 2005 as compared
fiscal 2004, was primarily due to the year-over-year decrease in sales of Ciprofloxacin, which in
the prior year we had purchased from Bayer.
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 fiscal
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 the prior year
were primarily due to a 35% decrease in one-time charges to SG&A partially offset by (1) $8.1
million in higher marketing costs associated with our proprietary product portfolio and (2) $7.1
million in higher product intangible amortization expense due to full year amortization on products
purchased in the prior year and amortization of products purchased during fiscal 2005.
53
Charges taken in fiscal 2004 that were included in SG&A are as follows (the charge taken in
fiscal 2005 is detailed above under the comparison of fiscal years 2006 and 2005):
|
|
|
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; |
|
|
|
|
A $4.2 million write-off in February 2004 associated with the acquisition of certain
emergency contraception assets from Gynetics, Inc; |
|
|
|
|
An arbitration panels decision in June 2004 to award Solvay Pharmaceuticals $68 million
in damages on its claim that we improperly terminated a joint venture agreement; and |
|
|
|
|
An $8.5 million charge in June 2004 related to costs associated with our settlement of
the Estrostep and Femhrt patent challenge litigation with Galen. |
Research and Development
The following table sets forth research and development expenses for fiscal 2005 and 2004 ($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 Scherings 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 Womens 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) $4.5 million
in higher headcount costs in support of the increased number of products in development.
Income Taxes
The following table sets forth income tax expense and the resulting effective tax rate stated
as a percentage of pre-tax income for fiscal 2005 and 2004 ($s in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
Income tax expense |
|
$ |
114.9 |
|
|
$ |
71.3 |
|
|
$ |
43.6 |
|
|
|
61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
34.8 |
% |
|
|
36.7 |
% |
|
|
|
|
|
|
|
|
54
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.
During fiscal 2005 the IRS completed audits of our federal income tax returns for fiscal 2002
and 2003. The resolution favorably impacted our effective tax rate for fiscal 2005 but did not have
a material effect on our financial position or liquidity.
Liquidity and Capital Resources
Overview
The following table highlights selected measures of our liquidity and capital resources as of
June 30, 2006 and 2005 ($s in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
2006 |
|
2005 |
|
$ |
|
% |
|
Cash & cash equivalents, short term marketable securities |
|
$ |
601.9 |
|
|
$ |
643.3 |
|
|
$ |
(41.4 |
) |
|
|
-6 |
% |
|
Working capital |
|
|
921.7 |
|
|
|
780.4 |
|
|
|
141.3 |
|
|
|
18 |
% |
|
Cash flow from operations |
|
|
327.3 |
|
|
|
363.0 |
|
|
|
(35.7 |
) |
|
|
-10 |
% |
|
Ratio of current assets to current liabilities |
|
|
5.9: 1 |
|
|
|
4.5: 1 |
|
|
|
|
|
|
|
|
|
Operating Activities
Our
operating cash flow for fiscal 2006 was $327.3 million compared to
$363.0 million in the prior year. The decrease in cash flows was due, in part, to the
negative impact of recording, in accordance with SFAS No. 123(R)
Share-Based Payment, $29 million of tax benefits on option exercises as financing cash
flows compared to its treatment as an operating cash flow item in
fiscal 2005. In addition, our operating
cash flows compared to last year were negatively impacted by increases in working capital discussed
below.
Our primary sources of cash from operations are (1) the collection of accounts and other
receivables related to product sales and (2) royalty and other payments from third parties in
various ventures, such as Teva with respect to generic Allegra and Kos with respect to Niaspan and
Advicor. Our primary uses of cash include financing inventory, research and development programs,
marketing and selling, capital projects and investing in business development activities.
Over the last three fiscal years, our cash flows from operations have been more than
sufficient to fund our operations, capital expenditures and business development activities. As a
result, our cash, cash equivalents and short-term marketable securities balances have increased
over that time.
Investment in Marketable Securities
Our investments in marketable securities provide a greater return on our cash balances
compared to leaving them in bank accounts. Our investments in marketable securities are governed by
our investment policy, which seeks to optimize returns while preserving capital, maintaining
adequate liquidity and investing in tax advantaged securities, as appropriate.
55
Working Capital
Working capital as of June 30, 2006 and 2005 consisted of the following ($s in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
Cash, cash equivalents and marketable securities |
|
$ |
601.9 |
|
|
$ |
643.3 |
|
|
$ |
(41.4 |
) |
|
|
-6 |
% |
Accounts receivable |
|
|
226.0 |
|
|
|
160.1 |
|
|
|
65.9 |
|
|
|
41 |
% |
Other receivables |
|
|
50.2 |
|
|
|
21.4 |
|
|
|
28.8 |
|
|
|
135 |
% |
Inventories |
|
|
134.3 |
|
|
|
137.6 |
|
|
|
(3.3 |
) |
|
|
-2 |
% |
Prepaid & other current assets |
|
|
96.6 |
|
|
|
38.4 |
|
|
|
58.2 |
|
|
|
152 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,109.0 |
|
|
|
1,000.8 |
|
|
|
108.2 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable & accrued liabilities |
|
|
169.2 |
|
|
|
201.6 |
|
|
|
(32.4 |
) |
|
|
-16 |
% |
Income taxes payable |
|
|
9.3 |
|
|
|
13.4 |
|
|
|
(4.1 |
) |
|
|
-31 |
% |
Current portion of long-term debt & capital leases |
|
|
8.8 |
|
|
|
5.4 |
|
|
|
3.4 |
|
|
|
63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
187.3 |
|
|
|
220.4 |
|
|
|
(33.1 |
) |
|
|
-15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
921.7 |
|
|
$ |
780.4 |
|
|
$ |
141.3 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital increased in fiscal 2006 primarily due to an increase in accounts receivable
and other receivables on higher product sales and alliance revenues during fiscal 2006. In
addition, prepaid and other current assets increased reflecting our purchase of a foreign currency
hedge in connection with our proposed PLIVA acquisition. Partially offsetting this increase was
a decrease in accounts payable and accrued liabilities largely as a result of the payment, in
December 2005, of $63 million to resolve the Mircette litigation that was accrued as of June 30,
2005.
Investing Activities
Our net cash used in investing activities was $506.5 million in fiscal 2006 compared to $177.0
million in fiscal 2005. This increase was primarily due to the acquisition of FEI Womens Health,
LLC and the Mircette product rights for a total of $378.4 million, along with the purchase of a
$48.9 million derivative instrument in connection with our
proposed PLIVA acquisition.
Capital Expenditures
During the three fiscal years ended June 30, 2006, we have invested approximately $163 million
in upgrades and expansions to our property, plant and equipment as well as technology investments,
including the purchase and implementation of a new SAP 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 help 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.
During fiscal 2006, we invested $61 million in capital projects and expect that our capital
investments will be between $50 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 additional investments in support of our new ERP system.
We believe we can continue funding our capital requirements using cash provided by operations.
56
Strategic Transactions
Our investments in strategic acquisitions were $378.4 million in fiscal 2006 as discussed
above and approximately $515 million for the three years ended June 30, 2006. We continuously
evaluate strategic transactions to further improve our business and long-range prospects and may
make additional investments or acquisitions over the next twelve months, including the proposed
acquisition of PLIVA.
Financing Activities
Net cash provided by financing activities was $87.8 million in fiscal 2006 compared to net
cash used in financing activities of $98.7 million in fiscal 2005. The increase compared to the
prior year is primarily due to classifying $29 million of tax benefits relating to our stock
incentives as financing activities as compared to classifying them as part of operating cash flows
in fiscal 2005, and to the $100 million funding of share repurchases under our share repurchase
program in fiscal 2005; there were no such share repurchases under this program in fiscal 2006.
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. In November 2005,
our Board of Directors extended the repurchase period through the end of December 2006. We hold
repurchased shares as treasury shares and may use them for general corporate purposes, including
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. We
did not repurchase any shares in fiscal 2006.
Debt Repayments and Credit Availability
Debt balances decreased by approximately $4 million from June 30, 2005 to June 30, 2006
reflecting principal repayments.
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.
Principal repayments on existing debt will be $8 million over the next twelve months.
On July 21, 2006, in anticipation of the funding required to consummate our tender offer for
PLIVA, we entered into an unsecured Senior Credit Facility (the Credit Facility) pursuant to which
lenders will provide us with an aggregate amount not to exceed
$2.8 billion. Of this amount, $2.0
billion is in the form of a five-year term facility, $500 million is in the form of a 364-day term
facility (combined, the term facilities), and $300 million is in the
form of a five-year revolving credit facility. The $2.5 billion
of term facilities, which bear interest at LIBOR plus 75 basis points, may be drawn only
in connection with, if consummated, our proposed PLIVA acquisition. The $300 million revolving
credit facility replaces our prior $175 million revolving credit facility, which we terminated on
July 21, 2006, and may be used for working capital, capital expenditures and general corporate
purposes. The Credit Facility includes customary covenants for agreements of this kind, including
financial covenants limiting our total indebtedness on a consolidated
basis. In July 2006, a letter of credit totaling approximately
1.9 billion was
issued on our behalf under the Credit Facility. The letter of credit,
which is being used to support our tender offer, is subject to fees
totaling 0.875% per annum for such time as it remains outstanding.
Proceeds from Equity Transactions
During fiscal 2006, we received proceeds of approximately $64 million from the exercise of
warrants and employee stock options and share purchases under our employee stock purchase plan. We
expect proceeds from future stock option exercises to decline over time, due in part, to our
decision to issue employees stock appreciation rights (SARs), rather than stock options. Upon
exercise of a stock option the Company receives proceeds equal to the grant price per share for
each option exercised. In contrast, the Company will not receive
57
cash
proceeds when a SAR is exercised because the employee receives a net number of shares. While the Company
will continue to receive proceeds from any remaining options that are
exercised, the amount of such
proceeds is difficult to predict because the proceeds are highly dependent upon our stock price,
which can be volatile.
Sufficiency of Cash Resources
We believe our current cash and cash equivalents, marketable securities, investment balances,
cash flows from operations and un-drawn amounts under our new credit facilities are adequate to
fund our operations and planned capital expenditures, the contemplated PLIVA acquisition, and to
capitalize on strategic opportunities as they arise. We have and will continue to evaluate our
capital structure as part of our goal to promote long-term shareholder value. To the extent that
additional capital resources are required, or if new or existing debt needs to be refinanced, we
believe that such capital may be raised by additional bank borrowings, debt offerings or other
means.
Contractual Obligations
Payments due by period for our contractual obligations at June 30, 2006 are as follows ($s in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Total |
|
|
1 Year |
|
|
1 to 3 Years |
|
|
4 to 5 Years |
|
|
Thereafter |
|
Long-term debt |
|
$ |
14.5 |
|
|
$ |
8.0 |
|
|
$ |
6.5 |
|
|
$ |
|
|
|
$ |
|
|
Capital leases |
|
|
1.2 |
|
|
|
0.9 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
30.7 |
|
|
|
4.2 |
|
|
|
7.0 |
|
|
|
6.7 |
|
|
|
12.8 |
|
Purchase obligations (1) |
|
|
112.3 |
|
|
|
107.3 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
Venture
Funds commitments (2) |
|
|
14.0 |
|
|
|
14.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual interest on fixed rate debt |
|
|
1.2 |
|
|
|
0.6 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Other long-term liabilities |
|
|
16.8 |
|
|
|
3.9 |
|
|
|
5.2 |
|
|
|
4.6 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
190.7 |
|
|
$ |
138.9 |
|
|
$ |
24.4 |
|
|
$ |
11.4 |
|
|
$ |
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase obligations consist mainly of commitments for raw materials used in our
manufacturing and research and development operations. |
|
(2) |
|
Payments related to our venture fund commitments are payable when capital calls are
made. |
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.
Off-Balance
Sheet Arrangements
The
Company does not have any material off-balance sheet arrangements
that have had, or are expected to have, an effect on our financial statements, other
than the letter of credit totaling approximately
1.9 billion
in support of our tender offer to acquire PLIVA, as discussed above.
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 provisions for estimated reductions to gross product
sales; (2) revenue recognition and provisions of alliance, development and other revenue; (3)
inventories and inventory reserves; (4) income taxes; (5) contingencies; and (6) acquisitions and
amortization of intangible assets. Although we believe that our estimates and assumptions are
reasonable, they are based upon information available at the time the estimates and assumptions
were made. We review the factors that influence our estimates and, if necessary, adjust them.
Actual results may differ significantly from our estimates.
58
Revenue Recognition and Provisions for Estimated Reductions to Gross Product Sales
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 customers 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 |
|
|
|
|
managed care rebates |
|
|
|
|
Medicaid rebates |
|
|
|
|
prompt payment discounts and other allowances |
For each of the items listed above other than managed care and Medicaid rebates, the estimated
amounts serve to reduce our accounts receivable balance. We include our estimate for managed care
and Medicaid rebates in accrued liabilities. A table showing the
activity of each reserve, based on these estimates, is set
forth below ($'s 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, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns and allowances |
|
$ |
52.7 |
|
|
$ |
59.8 |
|
|
$ |
0.2 |
|
|
$ |
(59.6 |
) |
|
$ |
53.1 |
|
Chargebacks |
|
|
44.9 |
|
|
|
386.0 |
|
|
|
(0.9 |
) |
|
|
(385.7 |
) |
|
|
44.3 |
|
Rebates |
|
|
37.8 |
|
|
|
164.5 |
|
|
|
(3.2 |
) |
|
|
(166.9 |
) |
|
|
32.2 |
|
Cash discounts |
|
|
7.1 |
|
|
|
40.4 |
|
|
|
|
|
|
|
(39.8 |
) |
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
142.5 |
|
|
$ |
650.7 |
|
|
$ |
(3.9 |
) |
|
$ |
(652.0 |
) |
|
$ |
137.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed care rebates |
|
$ |
7.5 |
|
|
$ |
20.5 |
|
|
$ |
(1.0 |
) |
|
$ |
(16.6 |
) |
|
$ |
10.4 |
|
Medicaid rebates |
|
$ |
10.1 |
|
|
$ |
29.0 |
|
|
$ |
|
|
|
$ |
(26.9 |
) |
|
$ |
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
36.0 |
|
|
|
188.4 |
|
|
|
|
|
|
|
(186.6 |
) |
|
|
37.8 |
|
Cash discounts |
|
|
6.2 |
|
|
|
32.0 |
|
|
|
|
|
|
|
(31.1 |
) |
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
138.5 |
|
|
$ |
552.8 |
|
|
$ |
7.0 |
|
|
$ |
(555.8 |
) |
|
$ |
142.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed care rebates |
|
$ |
3.4 |
|
|
$ |
12.2 |
|
|
$ |
|
|
|
$ |
(8.1 |
) |
|
$ |
7.5 |
|
Medicaid rebates |
|
$ |
11.4 |
|
|
$ |
17.2 |
|
|
$ |
3.0 |
|
|
$ |
(21.5 |
) |
|
$ |
10.1 |
|
59
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 products 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 customers 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
wholesalers 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
wholesalers 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 customers 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
60
by patient usage, contract performance,
as well as field inventory that will be subject to a managed care or Medicaid rebate.
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.
Revenue Recognition and Provisions of Alliance, Development and Other Revenue
We have agreements with certain pharmaceutical companies under which we receive payments based
on sales or profits associated with the applicable products. Our two most significant of these
agreements are those with Teva regarding generic Allegra and with Kos Pharmaceuticals regarding
Niaspan and Advicor. Revenue from these agreements is recognized at the time title and risk of loss
pass to a third party and is based on pre-defined formulas contained in our agreements, as adjusted
for our estimates of reserves needed to state our revenues on a basis consistent with our other
revenue recognition policies. The estimates we make to adjust our revenues are based on information
received from our partner, whether Teva or Kos, as well as our own internal information. Selling
and marketing expenses we incur under our co-promotion agreement with Kos are included in selling,
general and administrative expenses.
Inventories and 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, 2006
and 2005, 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
obsolescence as part of cost of sales.
Inventories are presented net of reserves of $24.7 million at June 30, 2006 and $13 million at
June 30, 2005.
61
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.
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 and Amortization of Intangible Assets
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. Intangible
assets are amortized based on sales over the expected life of the asset. Amortization expense is
included in the selling, general and administrative expense line item of the statement of
operations. 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.
62
As a result of our acquisitions, we have recorded goodwill of $48 million on our balance
sheets as of June 30, 2006 and $18 million as of June 30, 2005. In addition, as a result of our
acquisition of product rights and related intangibles and certain product licenses, we have
recorded $417 million and $98 million as other intangible assets, net of accumulated amortization,
on our balance sheets as of June 30, 2006 and 2005, 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 an alternative.
We 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.
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 also to previously
granted awards that are not fully vested on the effective date, compensation cost for the unvested
portion of some previously granted options are recognized under SFAS No. 123(R). 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 elected to utilize the modified prospective transition method for adopting SFAS 123(R).
Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the
date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of
adoption, determined under the original provisions of SFAS 123, shall be recognized in net earnings
in the periods after the date of adoption. Based on the adoption of the modified
prospective method, the Company recorded 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 that were granted.
In March 2005, the FASB published Interpretation No. 47 (FIN 47), Accounting for
Conditional Asset Retirement Obligations, which clarifies that the term conditional asset
retirement obligation, as used in SFAS No. 143, Accounting for Asset Retirement Obligations,
refers to a legal obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or may not be within the control of
the entity. The uncertainty about the timing and (or) method of settlement of a conditional asset
retirement obligation should be factored into the measurement of the liability when sufficient
information exists. The interpretation also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement obligation. The adoption
of this Interpretation during the second quarter of fiscal year 2006 did not have a material effect
on our consolidated financial position, results of operations or cash flows.
In November 2005, the FASB issued FASB Staff Position (FSP) FASB 115-1 and FASB 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP
provides guidance on determining if an investment is considered to be impaired, if the impairment
is other-than-temporary, and the measurement of an impairment loss. It also includes accounting
considerations subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. The guidance in this FSP amends SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities and is effective for reporting periods beginning after December 15,
2005. The adoption of this FSP did not have a material impact on our consolidated financial
statements.
63
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in an enterprises
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax
positions must meet a more-likely-than-not recognition threshold at the effective date to be
recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for
fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all
tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the
provisions of this Interpretation will be reported as an adjustment to the opening balance of
retained earnings for that fiscal year. We are currently evaluating the impact of FIN 48 on our
financial statements.
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.
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:
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the difficulty in predicting the timing and outcome of legal proceedings, including
patent-related matters such as patent challenge settlements and patent infringement cases; |
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the difficulty of predicting the timing of FDA approvals; |
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court and FDA decisions on exclusivity periods; |
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the ability of competitors to extend exclusivity periods for their products; |
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our ability to complete product development activities in the timeframes and for the costs we expect; |
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market and customer acceptance and demand for our pharmaceutical products; |
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our dependence on revenues from significant customers; |
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reimbursement policies of third party payors; |
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our dependence on revenues from significant products; |
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the use of estimates in the preparation of our financial statements; |
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the impact of competitive products and pricing on products, including the launch of
authorized generics; |
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the ability to launch new products in the timeframes we expect; |
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the availability of raw materials; |
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the availability of any product we purchase and sell as a distributor; |
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the regulatory environment; |
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our exposure to product liability and other lawsuits and contingencies; |
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the cost of insurance and the availability of product liability insurance coverage; |
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our timely and successful completion of strategic initiatives, including integrating
companies and products we acquire and implementing our new enterprise resource planning
system; |
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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 |
64
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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.
65
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for a change in interest rates relates primarily to our investment
portfolio of approximately $612.3 million. We do not use, nor have we historically used, derivative
financial instruments to manage this risk.
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 91% 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, 2006 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.
On
June 26, 2006, we entered into a foreign exchange option for a
notional amount equal to
1.8
billion to protect the value of our U.S. dollar investment in the proposed foreign currency
denominated acquisition of PLIVA. The foreign exchange option gives
us the right, but not the
obligation, to purchase Euro at the agreed upon strike price. The value of the foreign exchange
contract fluctuates depending on the value of the U.S.
dollar compared to the Euro. At June 30, 2006, for every one percent change in the value of the U.S. dollar compared
to the Euro, the value of the foreign exchange contract will
fluctuate by approximately $14 million. On June 30, 2006, the mark-to-market value of our foreign exchange option resulted in a
gain of $10.3 million. We expect the foreign exchange option to be settled concurrent with our
payment of the purchase price for PLIVA upon closing of the
acquisition, which, if successful, is expected to occur
in October or November, 2006.
None of our outstanding debt at June 30, 2006 bears interest at a variable rate.
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 SECs 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
managements control objectives.
At the conclusion of the period ended June 30, 2006, 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.
66
Internal Control Over Financial Reporting
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over
financial reporting for Barr Pharmaceuticals, Inc. (the
Company). 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 Companys internal control over
financial reporting as of June 30, 2006 using criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
This assessment included an evaluation of the design of the Companys 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, 2006, based upon the COSO
framework criteria.
Managements assessment of the effectiveness of the Companys internal control over financial
reporting as of June 30, 2006 has been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report which appears herein.
August 29, 2006
67
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of Barr Pharmaceuticals,
Inc.:
We have audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting, that Barr
Pharmaceuticals, Inc. and subsidiaries (the Company)
maintained effective internal control over financial reporting as of
June 30, 2006, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Companys management is responsible 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 managements assessment
and an opinion on the effectiveness of the Companys internal control
over financial reporting based on our audit.
We conducted our audit 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
effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting,
evaluating managements 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 audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or
persons performing similar functions, and effected by the companys 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 companys 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 companys 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, managements assessment that the Company maintained effective internal control
over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based
on the criteria established in Internal ControlIntegrated
Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal
control over financial reporting as of June 30, 2006, based on the criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the year ended June 30, 2006 of the Company. Our report dated August 29,
2006 expressed an unqualified opinion on those financial statements and financial statement
schedule and included an explanatory paragraph regarding
the Companys adoption of Statement of Financial Accounting
Standard No. 123(R), Share-Based
Payment, effective July 1, 2005.
/s/
DELOITTE & TOUCHE LLP
Parsippany,
New Jersey
August 29, 2006
68
Changes in Internal Controls
In October 2005, we began migrating certain financial and sales processing systems to our new
SAP enterprise resource-planning (ERP) platform. The migration of our remaining financial,
operational, and inventory processes was completed by June 30, 2006. In addition to expanding and
improving access to information, the new ERP system provides a standard scalable information
platform to accommodate business growth plans. In connection with the ERP system implementation,
we updated our internal controls over financial reporting, as necessary, to accommodate
modifications our business processes and to take advantage of enhanced automated controls provided
by the system. We believe we have taken the necessary steps to maintain internal control systems
that provide reasonable assurance of the accuracy of financial information.
ITEM 9B. OTHER INFORMATION
None.
69
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 9, 2006
(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 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 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.
70
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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(a) |
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a) Financial Statement Schedules: |
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See the Index on page F-1 below. |
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(b) |
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Exhibits |
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2.1 |
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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) |
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2.2 |
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Asset Purchase Agreement dated November 20, 2003 between Endeavor
Pharmaceuticals, Inc. and Barr Laboratories, Inc. (2) |
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2.3 |
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Agreement and Plan of Merger, dated February 6, 2004, among Duramed
Pharmaceuticals, Inc., WCC Merger Sub, Inc. and Womens Capital
Corporation (3) |
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2.4 |
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Purchase Agreement dated as of October 14, 2005, by and among Duramed
Pharmaceuticals, Inc., Copper 380T, FEI Womens Health, LLC and the
individuals listed on the signature pages thereto. (21) |
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3.1 |
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Amended and Restated Certificate of Incorporation of the Registrant (1) |
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3.2 |
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Restated By-Laws of the Registrant (1) |
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4.1 |
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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 there under does not exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis. |
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4.2 |
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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) |
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4.3 |
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Credit Agreement (five-year facilities), dated July 21, 2006, among the
Company, certain of its subsidiaries, Bank of America, N.A., as
Administrative Agent, Banc of America Securities LLC, as Lead Arranger and
Book Manager, and certain other lenders. (23) |
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4.4 |
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Credit Agreement (364-day facility), dated July 21, 2006, among the
Company, certain of its subsidiaries, Bank of America, N.A., as
Administrative Agent, Banc of America Securities LLC, as Lead Arranger and
Book Manager, and certain other lenders. (23) |
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10.1 |
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Lease, dated February 6, 2003, between Mack-Cali Properties Co. No. 11
L.P. and Barr Laboratories, Inc. (5) |
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10.2 |
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Amended and Restated Employment Agreement with Bruce L. Downey, dated as
of March 13, 2006 (22) |
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10.3 |
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1993 Stock Incentive Plan (7) |
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10.4 |
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Non-Qualified Deferred Compensation Plan (2) |
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10.5 |
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1993 Employee Stock Purchase Plan (8) |
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10.6 |
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1993 Stock Option Plan for Non-Employee Directors (9) |
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10.7 |
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2002 Stock and Incentive Award Plan (10) |
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10.8 |
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2002 Stock Option Plan for Non-Employee Directors (10) |
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10.9 |
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Supply Agreement for Ciprofloxacin Hydrochloride dated January 8, 1997 (11) |
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10.10 |
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Proprietary Drug Development and Marketing Agreement, dated March 20,
2000, between Barr Laboratories, Inc. and Dupont Pharmaceuticals Company
(12) |
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10.11 |
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Description of Excess Savings and Retirement Plan (13) |
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10.12 |
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Amended and Restated Employment Agreement with Paul M. Bisaro, dated as of
March 13, 2006 (22) |
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10.13 |
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Amended and Restated Employment Agreement with Carole S. Ben-Maimon, dated
as of October 24, 2002 (6) |
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10.14 |
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Amended and Restated Employment Agreement with Timothy P. Catlett, dated
as of February 19, 2003 (14) |
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10.15 |
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Amended and Restated Employment Agreement with William T. McKee, dated as
of February 19, 2003 (5) |
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10.16 |
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Amended and Restated Employment Agreement with Fredrick J. Killion, dated
as of February 19, 2003 (5) |
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10.17 |
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Amended and Restated Employment Agreement with Salah U. Ahmed, dated as of
February 19, 2003 (14) |
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10.18 |
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Amended and Restated Employment Agreement with Christine A. Mundkur, dated
as of February 19, 2003 (14) |
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10.19 |
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Amended and Restated Employment Agreement with Catherine F. Higgins, dated
as of February 19, 2003 (14) |
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10.20 |
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Employment Agreement with Michael J. Bogda, dated as of May 15, 2003 (14) |
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10.21 |
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Duramed 1988 Stock Option Plan (15) |
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10.22 |
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Duramed 1991 Stock Option Plan for Nonemployee Directors (16) |
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10.23 |
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Duramed 1997 Stock Option Plan (17) |
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10.24 |
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Duramed 2000 Stock Option Plan (18) |
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10.25 |
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Duramed 1999 Nonemployee Director Stock Plan (19) |
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10.26 |
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Employment Agreement with G. Frederick Wilkinson, dated as of January 5,
2006 (20) |
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21.0 |
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Subsidiaries of the Company |
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23.1 |
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Consent of Deloitte & Touche LLP |
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31.1 |
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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 |
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31.2 |
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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 |
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32.0 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
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(1) |
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Previously filed with the Securities and Exchange Commission on January 6, 2004 as an
Exhibit to the Registrants Current Report on Form 8-K and incorporated herein by
reference. |
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(2) |
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Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 and
incorporated herein by reference. |
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(3) |
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Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and
incorporated herein by reference. |
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(4) |
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Previously filed with the Securities and Exchange Commission as Exhibit 4-3 to the
Registrants Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 and
incorporated herein by reference. |
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(5) |
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Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and
incorporated herein by reference. |
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(6) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and
incorporated herein by reference. |
|
(7) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrants 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
Registrants 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
Registrants 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
Registrants 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
Registrants 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
Registrants 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
Registrants 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
Registrants 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. |
73
|
|
|
(20) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and
incorporated herein by reference. |
|
(21) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the
Registrants Quarterly Report on Form 10-Q for the quarter ended December 31, 2005 and
incorporated herein by reference. |
|
(22) |
|
Previously filed with the Securities and Exchange Commission on March 20, 2006 as an
Exhibit to the Registrants Current Report on Form 8-K and incorporated herein by reference. |
|
(23) |
|
Previously filed with the Securities and Exchange Commission on July 26, 2006 as an
Exhibit to the Registrants Current Report on Form 8-K and incorporated herein by reference. |
74
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 |
|
|
|
|
|
|
|
Chairman of the Board and Chief Executive Officer
|
|
August 29, 2006 |
Bruce L. Downey
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
Vice President, Chief Financial Officer and Treasurer
|
|
August 29, 2006 |
William T. McKee
|
|
(Principal Financial Officer and Principal Accounting Officer) |
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2006 |
Carole S. Ben-Maimon |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2006 |
Paul M. Bisaro |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2006 |
Harold N. Chefitz |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2006 |
Richard R. Frankovic |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2006 |
James S. Gilmore III |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2006 |
Jack M. Kay |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2006 |
Peter R. Seaver |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2006 |
George P. Stephan |
|
|
|
|
75
PART II
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
|
|
|
|
|
Page |
|
|
F-2 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-7 |
|
|
|
|
|
F-37 |
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, 2006 and 2005,
and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three
years in the period ended June 30, 2006. Our audits also included the financial statement schedule listed in the
Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the financial statements and financial statement schedule
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. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion,
such consolidated financial statements present fairly, in all material respects, the financial position of
Barr Pharmaceuticals, Inc. and subsidiaries at June 30, 2006 and 2005, and the results of their operations
and their cash flows for each of the three years in the period ended June 30, 2006, 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.
As discussed
in Note 14 to the consolidated financial statements, the Company adopted Statement of Financial Accounting
Standard No. 123(R), Share-Based Payment, effective July 1, 2005. As a result, the Company
began recording fair value stock-based compensation expense for its various share-based compensation
programs in the year ended June 30, 2006.
We have also
audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the effectiveness of the Companys internal control over financial reporting as of June 30, 2006, based on
the criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated August 29, 2006 expressed an unqualified
opinion on managements assessment of the effectiveness of the
Companys internal control over financial
reporting and an unqualified opinion on the effectiveness of the Companys internal control over financial
reporting.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
August 29, 2006
F-2
BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
(in thousands, except share and per share data) |
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
24,422 |
|
|
$ |
115,793 |
|
Marketable securities |
|
|
577,482 |
|
|
|
527,462 |
|
Accounts receivable, net |
|
|
226,026 |
|
|
|
160,059 |
|
Other receivables, net |
|
|
50,235 |
|
|
|
21,411 |
|
Inventories, net |
|
|
134,266 |
|
|
|
137,638 |
|
Deferred income taxes |
|
|
25,680 |
|
|
|
30,224 |
|
Prepaid expenses and other current assets |
|
|
70,871 |
|
|
|
8,229 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,108,982 |
|
|
|
1,000,816 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
275,960 |
|
|
|
249,485 |
|
Deferred income taxes |
|
|
30,204 |
|
|
|
60,504 |
|
Marketable securities |
|
|
18,132 |
|
|
|
53,793 |
|
Other intangible assets |
|
|
417,258 |
|
|
|
98,343 |
|
Goodwill |
|
|
47,920 |
|
|
|
17,998 |
|
Other assets |
|
|
22,963 |
|
|
|
9,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,921,419 |
|
|
$ |
1,490,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
69,954 |
|
|
$ |
49,743 |
|
Accrued liabilities |
|
|
99,213 |
|
|
|
151,888 |
|
Current portion of long-term debt and capital lease obligations |
|
|
8,816 |
|
|
|
5,446 |
|
Income taxes payable |
|
|
9,336 |
|
|
|
13,353 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
187,319 |
|
|
|
220,430 |
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations |
|
|
7,431 |
|
|
|
15,493 |
|
Other liabilities |
|
|
35,713 |
|
|
|
20,413 |
|
|
|
|
|
|
|
|
|
|
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 109,179,208 and 106,340,470 in 2006 and 2005, respectively |
|
|
1,092 |
|
|
|
1,063 |
|
Additional paid-in capital |
|
|
574,785 |
|
|
|
454,489 |
|
Retained earnings |
|
|
1,216,146 |
|
|
|
879,669 |
|
Accumulated other comprehensive loss |
|
|
(377 |
) |
|
|
(561 |
) |
|
|
|
|
|
|
|
Treasury stock at cost: 2,972,997 shares in 2006 and 2005, respectively |
|
|
(100,690 |
) |
|
|
(100,690 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,690,956 |
|
|
|
1,233,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,921,419 |
|
|
$ |
1,490,306 |
|
|
|
|
|
|
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-3
BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
(in thousands, except per share data) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
1,168,678 |
|
|
$ |
1,030,174 |
|
|
$ |
1,296,709 |
|
Alliance, development and other revenue |
|
|
145,787 |
|
|
|
17,225 |
|
|
|
12,379 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,314,465 |
|
|
|
1,047,399 |
|
|
|
1,309,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
352,118 |
|
|
|
304,080 |
|
|
|
632,745 |
|
Selling, general and administrative |
|
|
334,771 |
|
|
|
298,908 |
|
|
|
314,500 |
|
Research and development |
|
|
140,158 |
|
|
|
128,384 |
|
|
|
168,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
|
487,418 |
|
|
|
316,027 |
|
|
|
192,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
18,851 |
|
|
|
11,449 |
|
|
|
5,768 |
|
Interest expense |
|
|
489 |
|
|
|
1,463 |
|
|
|
2,643 |
|
Other income (expense) |
|
|
17,168 |
|
|
|
3,863 |
|
|
|
(1,533 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
522,948 |
|
|
|
329,876 |
|
|
|
194,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
186,471 |
|
|
|
114,888 |
|
|
|
71,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
336,477 |
|
|
$ |
214,988 |
|
|
$ |
123,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic |
|
$ |
3.20 |
|
|
$ |
2.08 |
|
|
$ |
1.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share diluted |
|
$ |
3.12 |
|
|
$ |
2.03 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
105,129 |
|
|
|
103,180 |
|
|
|
101,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
107,798 |
|
|
|
106,052 |
|
|
|
106,661 |
|
|
|
|
|
|
|
|
|
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-4
BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Paid |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid |
|
|
in Capital - |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
Shareholders |
|
(in thousands, except shares) |
|
Shares |
|
|
Amount |
|
|
in Capital |
|
|
Warrants |
|
|
Earnings |
|
|
Income / (Loss) |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
Balance, July 1, 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 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336,477 |
|
Unrealized gain on marketable
securities, net of tax of $106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336,661 |
|
Tax benefit of stock incentive plans
and warrants |
|
|
|
|
|
|
|
|
|
|
29,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,026 |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
27,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,092 |
|
Issuance of common stock for
exercised stock options and
employees stock purchase plans |
|
|
2,838,738 |
|
|
|
29 |
|
|
|
64,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2006 |
|
|
109,179,208 |
|
|
$ |
1,092 |
|
|
$ |
574,785 |
|
|
$ |
|
|
|
$ |
1,216,146 |
|
|
$ |
(377 |
) |
|
|
2,972,997 |
|
|
$ |
(100,690 |
) |
|
$ |
1,690,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-5
BARR PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
336,477 |
|
|
$ |
214,988 |
|
|
$ |
123,103 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
61,979 |
|
|
|
40,820 |
|
|
|
32,059 |
|
Stock-based compensation expense |
|
|
27,092 |
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit) |
|
|
34,739 |
|
|
|
7,100 |
|
|
|
(44,330 |
) |
Write-off of intangible asset |
|
|
|
|
|
|
|
|
|
|
22,333 |
|
Provision for losses on loans to Natural Biologics |
|
|
|
|
|
|
1,050 |
|
|
|
16,079 |
|
Gain on derivative instrument |
|
|
(10,300 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
(8,768 |
) |
|
|
2,480 |
|
|
|
17,699 |
|
Tax benefit of stock incentive plans and warrants |
|
|
|
|
|
|
39,846 |
|
|
|
25,262 |
|
Write-off of in-process research and development associated with acquisitions |
|
|
|
|
|
|
|
|
|
|
45,900 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other receivables, net |
|
|
(85,652 |
) |
|
|
36,678 |
|
|
|
34,671 |
|
Inventories, net |
|
|
24,598 |
|
|
|
12,614 |
|
|
|
13,771 |
|
Prepaid expenses |
|
|
(2,929 |
) |
|
|
6,396 |
|
|
|
(8,052 |
) |
Other assets |
|
|
(2,540 |
) |
|
|
6,668 |
|
|
|
(201 |
) |
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued liabilities and other liabilities |
|
|
(43,340 |
) |
|
|
1,169 |
|
|
|
(29,018 |
) |
Income taxes payable |
|
|
(4,017 |
) |
|
|
(6,774 |
) |
|
|
8,823 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
327,339 |
|
|
|
363,035 |
|
|
|
258,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(61,000 |
) |
|
|
(55,157 |
) |
|
|
(46,907 |
) |
Acquisitions, net of cash acquired |
|
|
(378,430 |
) |
|
|
(46,500 |
) |
|
|
(90,563 |
) |
Purchases of derivative instrument |
|
|
(48,900 |
) |
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
|
(2,120,480 |
) |
|
|
(1,220,869 |
) |
|
|
(1,126,043 |
) |
Sales of marketable securities |
|
|
2,108,979 |
|
|
|
1,152,485 |
|
|
|
1,001,130 |
|
Other |
|
|
(6,644 |
) |
|
|
(6,990 |
) |
|
|
(4,935 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(506,475 |
) |
|
|
(177,031 |
) |
|
|
(267,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt and capital leases |
|
|
(5,468 |
) |
|
|
(20,004 |
) |
|
|
(8,522 |
) |
Principal payment on note assumed in acquisition |
|
|
|
|
|
|
|
|
|
|
(6,500 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
(99,982 |
) |
|
|
|
|
Tax benefits of stock incentives |
|
|
29,026 |
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, employee stock purchases and warrants |
|
|
64,207 |
|
|
|
21,267 |
|
|
|
25,798 |
|
Other |
|
|
|
|
|
|
|
|
|
|
(291 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
87,765 |
|
|
|
(98,719 |
) |
|
|
10,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(91,371 |
) |
|
|
87,285 |
|
|
|
1,266 |
|
Cash and cash equivalents at beginning of period |
|
|
115,793 |
|
|
|
28,508 |
|
|
|
27,242 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
24,422 |
|
|
$ |
115,793 |
|
|
$ |
28,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of portion capitalized |
|
$ |
351 |
|
|
$ |
1,458 |
|
|
$ |
2,658 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
126,723 |
|
|
$ |
74,711 |
|
|
$ |
80,733 |
|
|
|
|
|
|
|
|
|
|
|
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-6
BARR PHARMACEUTICALS, INC. AND SUBSIDARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and 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.
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the U.S. The consolidated financial statements include the
accounts of wholly owned subsidiaries, after elimination of inter-company accounts and
transactions. Certain amounts in the 2004 and 2005 financial statements have been reclassified to
conform to the 2006 presentation.
(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.
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 as described
below.
The
Company is party to agreements with certain pharmaceutical companies under which it
receives payments based on sales or profits associated with the applicable products. The Companys
most significant of these agreements are with Teva regarding generic Allegra and with Kos regarding
Niaspan and Advicor. Alliance revenue is earned from these agreements at the time our third party
partners record sales and is based on pre-defined formulas contained in the agreements, as adjusted
for our estimates of reserves needed to state the Companys revenues on a basis consistent with its
other revenue recognition policies. The estimates the Company makes to adjust its revenues are
based on information received from its partner, whether Teva or Kos, as well as its own internal
information. Of total alliance development and other revenue,
approximately 92% was earned from the alliances with Teva and Kos for the year ended June 30, 2006. Receivables related to alliance, development and other
revenue are included in Other receivables, net in the
Consolidated Balance Sheets. Selling and marketing expenses incurred under the co-promotion
agreement with Kos are
included in selling, general and administrative expenses.
F-7
(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 Companys 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) Stock-Based Compensation
The
Company adopted Financial Accounting Standards Board (the
FASB) Statement of Financial Accounting Standard
(SFAS) No. 123 (revised
2004), Share-Based Payment (SFAS 123(R)), effective July 1, 2005. SFAS 123(R) requires the
recognition of the fair value of stock-based compensation in net earnings. 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. Stock-based
compensation consists of stock options, stock appreciation rights and the employee stock purchase
plan. Stock options and stock appreciation rights are granted to employees at exercise prices equal
to the fair market value of the Companys stock at the dates of grant. Generally, stock options and
stock appreciation rights granted to employees fully vest ratably over the three years from the
grant date and have a term of 10 years. Annual stock options granted to directors vest and are
generally exercisable on the date of the first annual shareholders meeting immediately following
the date of grant. The Company recognizes stock-based compensation expense over the requisite
service period of the individual grants, which generally equals the vesting period. Prior to July
1, 2005 the Company accounted 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 was
reflected in net earnings. For effects 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 (see Note 14).
(f) Research and Development
Research and development costs are expensed as incurred. These expenses include the costs of
the Companys research and development efforts, acquired in-process research and development, as
well as costs incurred in connection with the Companys third party collaboration efforts.
Pre-approved milestone payments due under contract research and development arrangements that are
paid 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.
(g) Advertising and Promotion Costs
Costs associated with advertising and promotions 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 $59,209, $52,006 and $45,637 for the years
ended June 30, 2006, 2005 and 2004, respectively.
(h) 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 when, based on available evidence, it is not more-likely-than-not
F-8
that a portion of
the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured
using enacted tax rates and laws.
(i) 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) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Numerator for basic and diluted
earnings per share -
Net earnings |
|
$ |
336,477 |
|
|
$ |
214,988 |
|
|
$ |
123,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Net earnings |
|
$ |
336,477 |
|
|
$ |
214,988 |
|
|
$ |
123,103 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: Weighted average shares |
|
|
105,129 |
|
|
|
103,180 |
|
|
|
101,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic |
|
$ |
3.20 |
|
|
$ |
2.08 |
|
|
$ |
1.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Net earnings |
|
$ |
336,477 |
|
|
$ |
214,988 |
|
|
$ |
123,103 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: Weighted average shares diluted |
|
|
107,798 |
|
|
|
106,052 |
|
|
|
106,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share diluted |
|
$ |
3.12 |
|
|
$ |
2.03 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of weighted average
common shares diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
105,129 |
|
|
|
103,180 |
|
|
|
101,823 |
|
Effect of dilutive options and warrants |
|
|
2,669 |
|
|
|
2,872 |
|
|
|
4,838 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
107,798 |
|
|
|
106,052 |
|
|
|
106,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not included in the calculation of diluted earnings per
share because their impact is antidilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding |
|
|
66 |
|
|
|
84 |
|
|
|
57 |
|
(j) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments including money market
securities with maturities of less than 90 days.
(k) Marketable Securities
The Companys investments in short-term marketable securities primarily consist of commercial
paper, market auction debt securities, municipal bonds and federal agency issues, which are readily
convertible into cash. The Company also invests in long-term marketable securities, including
municipal bonds. All marketable securities are classified as available for sale and, accordingly,
are recorded at current market value with offsetting adjustments to shareholders equity, net of
income taxes. The cost of investments sold is determined by the specific identification method.
(l) 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
F-9
inventory obsolescence as part of cost of sales. Inventories are presented net of allowances
relating to the above provisions.
(m) Venture Funds
The Company makes 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 accounts for these investments using the equity method of accounting.
(n) 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.
(o) 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, 2006 and 2005 is
estimated at $14,204 and $18,000,
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, 2006. 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.
(p) Derivative Instruments
The Company uses derivative instruments on a limited basis, principally to manage its exposure
to changes in foreign currency exchange rates. Derivative instruments are recorded at their fair
value on the balance sheet, while changes in the fair value of the instrument are recognized in the
current period earnings.
(q) 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.
(r) Acquisitions and Related Amortization Expense
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 Companys 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
F-10
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. Intangible assets are amortized based generally on sales over the expected
life of the asset. Amortization expense is included in the selling, general and administrative
expense line of the statement of operations. When the Company acquires 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 the Companys
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.
Impairment testing of goodwill compares the fair value of the
Companys reporting units to their carrying value. There has been no impairment
of goodwill recorded.
(s) Asset Impairment
The Company reviews the carrying value of its long-lived 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.
(t) 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 Companys assessment can involve judgments about
future events. The Company records anticipated recoveries under existing insurance contracts when
collection is reasonably assured.
(u) New Accounting Pronouncements
In
December 2004, the FASB issued 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.
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 also to
previously granted awards that are not fully vested on the effective date, compensation cost for
the unvested portion of some previously granted options is recognized under SFAS No. 123(R). 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.
F-11
The Company has elected to utilize the modified prospective transition method for adopting
SFAS 123(R). Under this method, the provisions of SFAS 123(R) apply to all awards granted or
modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested
at the date of adoption, determined under the original provisions of SFAS 123, are recognized in
net earnings in the periods after July 1, 2005. Based on the adoption of the modified
prospective method, the Company recorded a pre-tax stock based compensation expense of
approximately $27,000 in fiscal 2006. This amount represents previously issued awards vesting in
fiscal 2006 and 2006 fiscal year awards that have been granted.
In March 2005, the FASB published Interpretation No. 47 (FIN 47), Accounting for
Conditional Asset Retirement Obligations, which clarifies that the term conditional asset
retirement obligation, as used in Statement of SFAS No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an asset retirement activity in which the
timing and (or) method of settlement are conditional on a future event that may or may not be
within the control of the entity. The uncertainty about the timing and (or) method of settlement of
a conditional asset retirement obligation should be factored into the measurement of the liability
when sufficient information exists to reasonably estimate the fair value of an asset retirement
obligation. . The adoption of this Interpretation during the second quarter of fiscal year 2006 did
not have a material effect on the Companys consolidated financial position, results of operations
or cash flows.
In November 2005, the FASB issued FASB Staff Position (FSP) FASB 115-1 and FASB 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP
provides guidance on determining if an investment is considered to be impaired, if the impairment
is other-than-temporary, and the measurement of an impairment loss. It also includes accounting
considerations subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. The guidance in this FSP amends SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities and is effective for reporting periods beginning after December 15,
2005. The adoption of this FSP did not have a material impact on the Companys consolidated
financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in an enterprises
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax
positions must meet a more-likely-than-not recognition threshold at the effective date to be
recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for
fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all
tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the
provisions of this Interpretation will be reported as an adjustment to the opening balance of
retained earnings for that fiscal year. The Company is currently evaluating the impact of FIN 48 on
its financial statements.
(2) Acquisitions and Business Combinations
Fiscal 2006 Acquisitions
FEI Womens Health, LLC
On November 9, 2005, the Company acquired of all of the outstanding equity interests of FEI
Womens Health, LLC (FEI). FEI is the owner of the ParaGard® T 380A (Intrauterine
Copper Contraceptive) IUD, which is approved for continuous use for the prevention of pregnancy for
up to 10 years.
In accordance with SFAS No. 141, Business Combinations, the Company used the purchase method
of accounting to account for this transaction. Under the purchase method of accounting, the assets
acquired and liabilities assumed from FEI were recorded at the date of acquisition, at their
respective fair values. In connection with the acquisition the Company engaged a valuation firm to
assist management in its determination of the fair value of certain assets and liabilities of FEI.
The purchase price plus acquisition costs exceeded the fair values of acquired assets and assumed
liabilities. This resulted in the recognition of goodwill in the amount of $29,921. The total
purchase price, including acquisition costs of $5,112 less cash acquired of $4,372, was $289,730.
The
F-12
consolidated financial statements issued after completion of the acquisition reflect
these values. The operating
results of FEI are included in the consolidated financial statements subsequent to the
November 9, 2005 acquisition date.
The fair values of the assets acquired and liabilities assumed on November 9, 2005 were as
follows:
|
|
|
|
|
Current assets (excluding cash) |
|
$ |
30,876 |
|
Property and equipment |
|
|
1,955 |
|
Intangible
asset - ParaGard T 380A IUD |
|
|
256,000 |
|
Goodwill |
|
|
29,921 |
|
Other assets |
|
|
4,677 |
|
|
|
|
|
Total assets acquired |
|
$ |
323,429 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
10,780 |
|
Other liabilities |
|
|
22,919 |
|
|
|
|
|
Total liabilities assumed |
|
|
33,699 |
|
|
|
|
|
Net assets acquired |
|
$ |
289,730 |
|
|
|
|
|
|
|
|
|
|
Cash paid net of cash acquired |
|
$ |
289,730 |
|
|
|
|
|
The purchase price has been allocated based on an estimate of the fair value of assets
acquired and liabilities assumed as of the date of acquisition.
In accordance with the requirements of SFAS No. 142, Goodwill and Other Intangible Assets,
the goodwill associated with the acquisition will not be amortized.
The ParaGard T 380A IUD intangible asset will
be amortized based on estimated product sales over its estimated 20-year life. Goodwill and the
intangible asset resulting from this acquisition have been allocated to our proprietary reporting
unit.
The following unaudited pro forma financial information presents the combined results of
operations of the Company and FEI as if the acquisition had occurred as of the beginning of the
periods presented. The unaudited pro forma financial information is not necessarily indicative of
what our consolidated results of operations actually would have been had we completed the
acquisition at the dates indicated. In addition, the unaudited pro forma financial information does
not purport to project the future results of operations of the combined company.
Barr Pharmaceuticals, Inc. and Subsidiaries
Pro Forma Condensed Combined Consolidated Statements of Operations
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
2005 |
|
Revenues |
|
|
(1 |
) |
|
$ |
1,337,603 |
|
|
|
(4 |
) |
|
$ |
1,098,298 |
|
Earnings from operations |
|
|
(2 |
) |
|
|
492,233 |
|
|
|
(5 |
) |
|
|
301,010 |
|
Net earnings |
|
|
(3 |
) |
|
|
338,042 |
|
|
|
(6 |
) |
|
|
201,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic |
|
|
|
|
|
$ |
3.22 |
|
|
|
|
|
|
$ |
1.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share diluted |
|
|
|
|
|
$ |
3.14 |
|
|
|
|
|
|
$ |
1.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
|
|
|
|
105,129 |
|
|
|
|
|
|
|
103,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
|
|
|
|
107,798 |
|
|
|
|
|
|
|
106,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
|
|
|
(1) |
|
This amount includes $23,138 of FEI pre-acquisition net revenues for the period July 1, 2005
thru November 9, 2005. |
|
(2) |
|
This amount includes amortization expense of $5,607 for the intangible asset that was
acquired and a charge for the amount of the step-up in inventory to fair value of $20,741. |
|
(3) |
|
This amount includes an add back of $671 for interest expense paid before the acquisition and
a charge for reduced interest income of $2,379 relating to the reduction of available funds to
be invested due to the acquisition. |
|
(4) |
|
This amount includes $50,899 of FEI net revenues for the twelve months ended June 30, 2005. |
|
(5) |
|
This amount includes amortization expense of $5,544 for the intangible asset that was
acquired and a charge for the amount of the step-up in inventory to fair value of $25,793. |
|
(6) |
|
This amount includes an add back of $2,663 for interest expense paid before the acquisition
and a charge for reduced interest income of $5,406 relating to the reduction of available
funds to be invested due to the acquisition. |
Products from Organon Ltd., Organon USA Inc. and Savient Pharmaceuticals, Inc.
On June 15, 2005, the Company entered into a non-binding Letter of Intent with Organon
(Ireland) Ltd., Organon USA Inc. (Organon) and Savient Pharmaceuticals, Inc. (Savient) to
acquire the New Drug Application (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 $152,750. At the time the Letter of Intent was signed,
because the proposed transaction included, as one of its components, a payment in settlement of
litigation, it was presumed under GAAP to give rise to a probable loss, as defined in SFAS No. 5,
Accounting for Contingencies. Based on valuations of the assets the Company acquired and total
estimated payments, the Company recorded a charge of $63,238 as of June 30, 2005 to reflect the
litigation settlement.
On December 2, 2005, the Company and Organon finalized an agreement that gave the Company
exclusive rights to Mircette. The agreement also terminated the ongoing patent litigation regarding
the Companys generic version of Mircette, which is marketed under the trade name Kariva®. The
agreement called for the Company to pay Organon $139,000 and Savient $13,750. Based on final
valuations of the asset, the Company has recorded an intangible asset in the amount of $88,700 and
recorded an additional charge of $813 for the difference between the estimated amounts recorded as
a probable loss at June 30, 2005 and the final loss amount. The Company also incurred approximately
$1,800 of additional legal and accounting costs related to the transaction. Additionally, the
Company was reimbursed $11,000 from a third party for partial reimbursement of the Companys
recorded charge on this transaction. This reimbursement is reflected as a reduction of selling,
general and administrative expenses.
Fiscal 2005 and 2004 Acquisitions
Urinary Incontinence Product
In June 2002, the Company acquired certain assets and liabilities from Enhance
Pharmaceuticals, Inc. including a Product Development and License Agreement with Schering AG. In
March 2004, Barr and Schering agreed that Barr would acquire the worldwide rights to the product,
which terminated Product Development and License Agreement. Accordingly, during fiscal 2004 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.
Endeavor Pharmaceuticals, Inc.
On November 20, 2003, the Company completed the acquisition of substantially all of the assets of
Endeavor Pharmaceuticals, Inc. (Endeavor). The total
purchase price of $35,600 was allocated
to acquired in-process
research and development. This amount was written-off upon acquisition as research and development
expense
F-14
because the acquired products had not received approval from the FDA, were incomplete and
had no alternative future use. The operating results of Endeavor are included in the consolidated
financial statements subsequent to the November 20, 2003 acquisition date.
Womens Capital Corporation
In February 2004, the Company acquired 100% of the outstanding shares of Womens 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. As part of the allocation of the purchase price, an
intangible asset of $2,200 representing the fair value of the currently marketed prescription
version of Plan B was amortized over one year during fiscal 2005 and 2004. 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
operating results of WCC are included in the consolidated financial statements subsequent to the
February 25, 2004 acquisition date.
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®. 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.
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 based on estimated product sales over
an estimated useful life of 10 years.
Buy-out
of Royalty Interest 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 SEASONALE, from the former patent holder. This payment is recorded as other
intangible assets on the consolidated balance sheets and is being amortized based on estimated product sales over an estimated
useful life of 15 years.
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 based on estimated product sales over an estimated useful life of 15 years.
(3) Derivative Instruments
On
June 26, 2006, the Company entered into a currency option
agreement with a bank for a notional amount equal to 1.8 billion
at a cost of $48,900 in order
to hedge its foreign exchange risk related to the proposed
acquisition of PLIVA (See Note 19). As of June 30, 2006, the value of this
instrument increased to $59,200. The instrument is classified on the balance sheet in prepaid
expenses and other current assets. The increase in the value was recorded as other non-operating
income for the year ended June 30, 2006 (See Note 16). The item does not meet the criteria required
to qualify as a foreign currency cash flow hedge, as FASB No. 133 Accounting for Financial
Instruments and Hedging Activities, specifically prohibits hedge accounting for an option acquired
in connection with a
forecasted or firmly committed business combination. Accordingly, the Company adjusts its
carrying cost to the fair market value at the end of each period.
F-15
(4) Accounts
Receivable, net
The components of accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Trade accounts receivable |
|
$ |
357,268 |
|
|
$ |
296,994 |
|
Other trade receivables |
|
|
6,055 |
|
|
|
5,549 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
363,323 |
|
|
|
302,543 |
|
Less: allowances |
|
|
137,297 |
|
|
|
142,484 |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
226,026 |
|
|
$ |
160,059 |
|
|
|
|
|
|
|
|
(5) Inventories, net
The components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials and supplies |
|
$ |
86,239 |
|
|
$ |
79,120 |
|
Work-in-process |
|
|
22,063 |
|
|
|
16,405 |
|
Finished goods |
|
|
25,964 |
|
|
|
42,113 |
|
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
134,266 |
|
|
$ |
137,638 |
|
|
|
|
|
|
|
|
Inventories are presented net of reserves of $24,721 and $13,415 at June 30, 2006 and June 30,
2005, respectively. During the year ended June 30, 2006 work-in-process and finished goods amounts
included inventory acquired in the FEI transaction that was stated at fair value. Based on units
sold from the closing date (November 10, 2005) through June 30, 2006, the Company charged cost of
sales for $20,741, which represents the entire amount of the step-up adjustment of acquired
inventory to fair value.
(6) Property, plant and equipment, net
The major categories of the Companys property, plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Land |
|
$ |
8,317 |
|
|
$ |
7,461 |
|
Buildings and improvements |
|
|
140,149 |
|
|
|
135,737 |
|
Machinery and equipment |
|
|
253,088 |
|
|
|
189,906 |
|
Leasehold improvements |
|
|
9,345 |
|
|
|
8,414 |
|
Construction in progress |
|
|
28,723 |
|
|
|
37,584 |
|
|
|
|
|
|
|
|
|
|
|
439,622 |
|
|
|
379,102 |
|
Less: accumulated depreciation and amortization |
|
|
163,662 |
|
|
|
129,617 |
|
|
|
|
|
|
|
|
Total plant, property and equipment, net |
|
$ |
275,960 |
|
|
$ |
249,485 |
|
|
|
|
|
|
|
|
Depreciation expense was $35,850, $31,591 and $25,678 for the years ended June 30, 2006, 2005
and 2004, respectively.
F-16
(7) Marketable Securities
The amortized cost and estimated market values of marketable securities at June 30, 2006 and
2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Value |
|
June 30,
2006 |
|
|
|
|
|
|
|
|
Debt securities |
|
$ |
588,421 |
|
|
$ |
|
|
|
$ |
(592 |
) |
|
$ |
587,829 |
|
Equity securities |
|
|
7,785 |
|
|
|
|
|
|
|
|
|
|
|
7,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
596,206 |
|
|
$ |
|
|
|
$ |
(592 |
) |
|
$ |
595,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
$ |
576,687 |
|
|
$ |
|
|
|
$ |
(881 |
) |
|
$ |
575,806 |
|
Equity securities |
|
|
5,449 |
|
|
|
|
|
|
|
|
|
|
|
5,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
582,136 |
|
|
$ |
|
|
|
$ |
(881 |
) |
|
$ |
581,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost of investments sold is determined by the specific identification method.
Debt securities at June 30, 2006 with a market value of $587,829 include $517,267 in
commercial paper and market auction debt securities, which are readily convertible into cash at par
value with interest rate reset or underlying maturity dates ranging from July 3, 2006 to June 15,
2007, and $70,562 in municipal and corporate bonds and federal agency issues with maturity dates
ranging from March 15, 2007 to February 1, 2009.
Equity securities include amounts invested in connection with the Companys excess 401(k) and
other deferred compensation plans.
(8) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following at June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Goodwill |
|
$ |
47,920 |
|
|
$ |
17,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses |
|
$ |
45,350 |
|
|
$ |
45,600 |
|
Product rights and related intangibles |
|
|
415,745 |
|
|
|
70,796 |
|
|
|
|
|
|
|
|
|
|
|
461,095 |
|
|
|
116,396 |
|
Less: accumulated amortization |
|
|
(43,837 |
) |
|
|
(18,053 |
) |
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
417,258 |
|
|
$ |
98,343 |
|
|
|
|
|
|
|
|
As a result of the FEI acquisition during the second quarter of fiscal 2006, the Company
recorded goodwill in the amount of $29,921 and an intangible asset in the amount of $256,000 in
recognition of the fair value for the ParaGard IUD product rights acquired (see Note 2). The
entire goodwill balance at June 30, 2006, $47,920, is related to the Companys proprietary products
segment.
In December 2005, the Company finalized an agreement that gave the Company exclusive rights to
Mircette. The agreement also terminated the ongoing patent litigation regarding the Companys
generic version of Mircette, which is marketed under the trade name Kariva®. Based on final
valuations of the asset, the Company recorded an intangible asset in the amount of $88,700 (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:
F-17
|
|
|
|
|
Year Ending June 30, |
|
|
|
|
2007 |
|
$ |
34,920 |
|
2008 |
|
|
32,658 |
|
2009 |
|
|
24,772 |
|
2010 |
|
|
22,862 |
|
2011 |
|
|
21,757 |
|
The Companys product licenses and product rights and related intangibles have weighted
average useful lives of approximately 10 and 18 years, respectively. Amortization expense
associated with these acquired intangibles is included in selling, general and administrative
expenses and totaled $25,784 and $13,354 for the years ended June 30, 2006 and 2005
respectively.
(9) 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
Companys Cenestin tablets and Solvays Prometrium® capsules. Solvay disputed the
Companys 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.
(10) Accrued liabilities
Accrued liabilities consist of the following at June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Profit splits due to third parties |
|
$ |
22,007 |
|
|
$ |
23,158 |
|
Payroll, taxes & benefits |
|
|
21,283 |
|
|
|
19,184 |
|
Medicaid obligations |
|
|
12,167 |
|
|
|
10,060 |
|
Managed care rebates |
|
|
10,370 |
|
|
|
7,460 |
|
Legal settlement |
|
|
|
|
|
|
63,238 |
|
Other |
|
|
33,386 |
|
|
|
28,788 |
|
|
|
|
|
|
|
|
Total accrued liabilities |
|
$ |
99,213 |
|
|
$ |
151,888 |
|
|
|
|
|
|
|
|
(11) Long-term Debt
A summary of long-term debt is as follows:
F-18
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Senior Unsecured Notes (a) |
|
$ |
8,000 |
|
|
$ |
12,000 |
|
Note Due to WCC Shareholders (b) |
|
|
6,500 |
|
|
|
6,500 |
|
|
|
|
|
|
|
|
|
|
|
14,500 |
|
|
|
18,500 |
|
Less: Current installments of long-term debt |
|
|
(8,000 |
) |
|
|
(4,000 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
6,500 |
|
|
$ |
14,500 |
|
|
|
|
|
|
|
|
(a) |
|
The Senior Unsecured Notes consists of an $8,000, 7.01% Note due November 18, 2006. Remaining
principal payments under the Note amount to $8,000 and are expected to be paid in the next
twelve months. |
|
|
|
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 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. |
During fiscal 2006, the Company maintained a five-year $175,000 revolving credit facility. As
of June 30, 2006, there were no borrowings outstanding under this facility. In July 2006, the
Company terminated this revolving credit facility and replaced it with a five-year $300,000
revolving credit facility that was entered into as part of the Companys financing arrangements to
support its proposed PLIVA acquisition (see Note 19).
Principal maturities of existing long-term debt for the next five years and thereafter are as
follows:
|
|
|
|
|
Years Ending June 30, |
|
|
|
|
2007 |
|
$ |
8,000 |
|
2008 |
|
|
6,500 |
|
2009 |
|
|
|
|
2010 |
|
|
|
|
2011 and thereafter |
|
|
|
|
(12) Related-party Transactions
Dr. Bernard
C. Sherman and Jack 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 Companys Board of Directors until October 24, 2002 and is the
principal stockholder of Sherman Delaware, Inc., which owned approximately 5.0% of the Companys
outstanding common stock at June 30, 2006. In addition, Jack 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 Companys 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 one of
its products marketed and sold by Apotex
Inc. in Canada.
F-19
The table below sets forth information regarding transactions with companies owned or
controlled by Dr. Sherman.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Purchases from the Sherman Companies |
|
$ |
4,931 |
|
|
$ |
5,575 |
|
|
$ |
2,808 |
|
|
|
|
|
|
|
|
|
|
|
Sales to the Sherman Companies |
|
$ |
15,802 |
|
|
$ |
10,149 |
|
|
$ |
9,486 |
|
|
|
|
|
|
|
|
|
|
|
Recovery of shared litigation costs
included in operating expenses |
|
$ |
13 |
|
|
$ |
77 |
|
|
$ |
1,004 |
|
|
|
|
|
|
|
|
|
|
|
Profit split charged to cost of goods |
|
$ |
586 |
|
|
$ |
1,027 |
|
|
$ |
3,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty revenue |
|
$ |
557 |
|
|
$ |
216 |
|
|
$ |
295 |
|
|
|
|
|
|
|
|
|
|
|
One
member of the Companys Board of Directors is a partner at a law
firm utilized by the Company for certain patent and litigation
services. Expenses related to these services were $1,026, $124 and
$-0- for the years ended June 30, 2006, 2005 and 2004,
respectively. As of June 30, 2006 and June 30, 2005,
amounts owed to the law firm totaled approximately $99 and $124,
respectively.
(13) Income Taxes
A summary of the components of income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
135,362 |
|
|
$ |
101,355 |
|
|
$ |
101,477 |
|
State |
|
|
16,370 |
|
|
|
6,482 |
|
|
|
18,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
151,732 |
|
|
$ |
107,837 |
|
|
$ |
119,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
30,780 |
|
|
$ |
4,441 |
|
|
$ |
(41,348 |
) |
State |
|
|
3,959 |
|
|
|
2,610 |
|
|
|
(6,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
34,739 |
|
|
|
7,051 |
|
|
|
(48,237 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
186,471 |
|
|
$ |
114,888 |
|
|
$ |
71,337 |
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Federal income taxes at statutory rate |
|
$ |
183,032 |
|
|
$ |
115,457 |
|
|
$ |
68,054 |
|
State income
taxes, net of federal income tax effect |
|
|
14,099 |
|
|
|
9,092 |
|
|
|
6,687 |
|
Tax credits |
|
|
(2,778 |
) |
|
|
(6,900 |
) |
|
|
(5,900 |
) |
Domestic Manufacturers Deduction (IRC Section 199) |
|
|
(3,661 |
) |
|
|
|
|
|
|
|
|
Write-off of in-process research and development |
|
|
|
|
|
|
|
|
|
|
3,605 |
|
Other, net |
|
|
(4,221 |
) |
|
|
(2,761 |
) |
|
|
(1,109 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
186,471 |
|
|
$ |
114,888 |
|
|
$ |
71,337 |
|
|
|
|
|
|
|
|
|
|
|
The temporary differences that give rise to deferred tax assets and liabilities as of June 30,
2006 and 2005 are as follows:
F-20
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss |
|
$ |
3,008 |
|
|
$ |
3,677 |
|
Receivable reserves |
|
|
16,541 |
|
|
|
17,833 |
|
Inventory |
|
|
3,820 |
|
|
|
2,865 |
|
Warrants issued |
|
|
14,844 |
|
|
|
16,366 |
* |
Capital loss carryforward |
|
|
|
|
|
|
2,864 |
|
Amortization of intangibles/goodwill |
|
|
35,593 |
|
|
|
60,467 |
|
Deferred revenue |
|
|
5,366 |
|
|
|
7,239 |
|
Stock Compensation |
|
|
6,966 |
|
|
|
|
|
Investments |
|
|
215 |
* |
|
|
320 |
* |
Solvay litigation |
|
|
|
|
|
|
4,003 |
|
Other |
|
|
461 |
|
|
|
7,108 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
86,814 |
|
|
|
122,742 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Plant and equipment |
|
|
(27,857 |
) |
|
|
(24,905 |
) |
Other |
|
|
(2,312 |
) |
|
|
(3,452 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(30,169 |
) |
|
|
(28,357 |
) |
Less valuation allowance |
|
|
(761 |
) |
|
|
(3,657 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
55,884 |
|
|
$ |
90,728 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
changes reflected directly in equity |
At June 30, 2006 and 2005, as a result of certain acquisitions, the Company had
cumulative regular net operating loss carryforwards of approximately $3,008 and $3,677,
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 carry forward,
which is calculated under Internal Revenue Code Section 382.
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 carry forwards.
A valuation allowance is recorded 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 Companys 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,
2006, the Company reduced the valuation allowance by $2,896 due to the expiration of the statute of
limitations related to the carry forward of certain capital losses as well as the associated
deferred tax asset. 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) Stockholders Equity /Stock-Based Compensation
The Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)),
effective July 1, 2005. SFAS 123(R) requires the recognition of the fair value of stock-based
compensation in net earnings. The Company has three stock-based employee compensation plans, two
stock-based non-employee director compensation plans and an employee stock purchase plan.
Stock-based compensation granted to date consists of stock options, stock-settled stock
appreciation rights and the employee stock purchase plan. Stock options and stock-settled stock
appreciation rights are granted to employees at exercise prices equal to the fair market value of
the Companys stock at the dates of grant. Generally, stock options and stock appreciation rights
granted to employees fully vest ratably over the three years from the grant date and have a term of
10 years. Annual stock options granted to directors generally become exercisable on the date of the
first annual shareholders meeting immediately following the date of grant. The Company recognizes
stock-based compensation expense over the requisite service period of the individual grants, which
generally equals the vesting period. The Company has issued and
expects to continue to issue, new shares
under Form S-8 to satisfy option and stock appreciation right exercises.
F-21
Prior to July 1,
2005, the Company accounted for these plans under the intrinsic value method
described in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. The Company, applying the intrinsic value method, did not
record stock-based compensation cost in net earnings because the exercise price of its stock
options equaled the market price of the underlying stock on the date of grant. The Company elected
to utilize the modified prospective transition method for adopting SFAS 123(R). Under this method,
the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption.
In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined
under the original provisions of SFAS 123, are recognized in net earnings in the periods after the
date of adoption. The Company recognized stock-based compensation expense for the fiscal year 2006
in the amount of $27,092. The Company also recorded related tax benefits for the fiscal year 2006
in the amount of $7,320. The effect on net income from recognizing stock-based compensation for
the year ended June 30, 2006 was $19,772, or $0.19 per basic share and $0.18 per diluted share.
SFAS 123(R)
requires the Company to present pro forma information for periods prior to the
adoption as if it had accounted for all stock-based compensation under the fair value method of
that statement. For purposes of pro forma disclosure, the estimated fair value of the awards at the
date of grant is amortized to expense over the requisite service period, which generally equals the
vesting period. The following table illustrates the effect on net earnings and earnings per share
as if the Company had applied the fair value recognition provisions of SFAS 123(R) to its
stock-based employee compensation for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
(in thousands, expect per share data) |
| | |
Year Ended June 30, |
|
|
|
|
|
2005 |
|
|
2004 |
|
NET EARNINGS, AS REPORTED |
|
|
|
$ |
214,988 |
|
|
$ |
123,103 |
|
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 |
|
|
|
|
|
|
|
|
|
|
PRO FORMA NET EARNINGS |
|
|
|
$ |
194,810 |
|
|
$ |
109,356 |
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
|
|
$ |
2.08 |
|
|
$ |
1.21 |
|
|
|
|
|
|
|
|
|
|
Basic pro forma |
|
|
|
$ |
1.89 |
|
|
$ |
1.07 |
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
|
|
$ |
2.03 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
Diluted pro forma |
|
|
|
$ |
1.84 |
|
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
|
For all of the Companys stock-based compensation plans, the fair value of each grant was
estimated at the date of grant using the Black-Scholes option-pricing model. Black-Scholes utilizes
assumptions related to volatility, the risk-free interest rate, the dividend yield (which is
assumed to be zero, as the Company has not paid any cash dividends) and employee exercise behavior.
Expected volatilities utilized in the model are based mainly on the historical volatility of the
Companys stock price and other factors. The risk-free interest rate is derived from the U.S.
Treasury yield curve in effect in the period of grant. The model incorporates exercise and
post-vesting forfeiture assumptions based on an analysis of historical data. The expected life of
the fiscal 2006 grants is derived from historical and other factors.
F-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2006 |
|
2005 |
|
2004 |
Average expected term (years) |
|
|
5.0 |
|
|
|
3.3 |
|
|
|
3.5 |
|
Weighted average risk-free interest rate |
|
|
3.76 |
% |
|
|
2.40 |
% |
|
|
2.20 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Volatility |
|
|
36.85 |
% |
|
|
48.22 |
% |
|
|
54.15 |
% |
Weighted
average grant date fair value |
|
$ |
18.57 |
|
|
$ |
12.90 |
|
|
$ |
17.79 |
|
As of June 30, 2006 and 2005, the aggregate intrinsic value of awards outstanding and exercisable was
$100,483 and $85,740, respectively. In addition, the aggregate intrinsic value of awards exercised
during the fiscal years ended June 30, 2006, 2005 and 2004 were $99,304, $29,961 and $69,284,
respectively. The total remaining unrecognized compensation cost related to unvested awards
amounted to $28,715 at June 30, 2006 and is expected to be recognized over the next three years. The
weighted average remaining requisite service period of the unvested awards was 23 months. The total
fair value of awards that vested during the fiscal years ended June 30, 2006, 2005 and 2004 were
$24,732, $22,647 and $11,196, respectively.
Employee Stock Compensation Plans
The
Company has three employee stock compensation plans: the Barr Pharmaceuticals, Inc. 2002
Stock and Incentive Award Plan (the 2002 Stock Plan); the Barr Pharmaceuticals, Inc. 1993
Stock Incentive Plan (the 1993 Stock 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 Companys common stock. These plans also authorize the granting of other
awards based on Company common stock to officers and employees, including but not limited to stock
appreciation rights, unrestricted stock, restricted stock, performance unit and performance share
awards. On February 20, 2003, all shares available for grant in the 1993 Stock Plan were
transferred to the 2002 Stock Plan and all subsequent grants have been made under the 2002 Stock
Plan. Effective June 30, 1996, options were no longer granted under the 1986 Option Plan. For
fiscal 2006, 2005 and 2004, there were no options that expired under
the 1986 Option Plan.
Until fiscal 2006, all awards granted under the 1993 Stock Plan and the 2002 Stock Plan were
non-qualified stock options (NQSOs) or tax-qualified incentive stock options (ISOs). All
options outstanding on October 24, 2001 became fully exercisable upon completion of the Duramed
merger. Options granted after October 24, 2001 become fully exercisable over periods as short as
one year and as long as five years from the date of grant, provided there is no interruption of the
optionees employment, and subject to acceleration of exercisability in the event of the death of
the optionee or a change in control as defined in the plan under which the options were granted.
Options granted to date under the 1993 Stock Plan and the 2002 Stock Plan expire ten years after
the date of grant except in case of earlier termination of employment, in which case the options
generally expire on such termination or within defined periods of up to one year thereafter,
depending on the circumstances of such termination, but in no event more than ten years after the
date of grant.
During fiscal 2006, we began to grant employees stock-settled stock appreciation rights
(SSARs) rather than stock options, and to grant certain employees tax-qualified incentive stock
options (ISOs) in tandem with alternative stock-settled SARs (Tandem ISOs/SSARs). Each Tandem
ISO/SAR gives the employee the right to either exercise the ISO with respect to one share of stock
or exercise the SSAR with respect to one share of stock, but not both. Employees must pay the
option exercise price in order to exercise an ISO, but they do not pay any exercise price in order
to exercise a SSAR. Upon exercise of a SSAR, the employee receives the appreciation on one share of
Company common stock between the date of grant of the SSAR and the date of exercise of the SSAR.
The appreciation is paid in the form of Company common stock valued at fair market value on the
date of the SSAR exercise. Upon exercise of a stock option the Company receives proceeds equal to
the exercise price per share for each option exercised. In contrast, the Company does not receive
cash proceeds when a SSAR is exercised.
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, became exercisable as of October 24, 2001,
the effective date of the merger. Barr assumed such options 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 option activity under the Companys employee stock compensation plans as of
June 30, 2006, and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Weighted-Average |
|
|
Aggregate |
|
|
|
Option/SARs |
|
|
Weighted-Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Awards |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
Value |
|
Outstanding at June 30, 2005 |
|
|
8,221,058 |
|
|
|
$ 28.96 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,620,000 |
|
|
|
48.04 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(138,019 |
) |
|
|
42.59 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,710,082 |
) |
|
|
22.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
6,992,957 |
|
|
|
$ 35.72 |
|
|
|
6.82 |
|
|
$ |
87,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant (20,067,188 authorized) |
|
|
2,987,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
4,125,538 |
|
|
|
$ 30.36 |
|
|
|
5.67 |
|
|
$ |
72,925 |
|
Available for grant and authorized amounts are for the 2002 Stock Plan only, because as of
June 30, 2003 employee stock options are no longer granted under the 1993 Stock Plan or any plan
other than the 2002 Stock Plan.
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). On October 24, 2002, the
shareholders approved the Barr Pharmaceuticals, Inc. 2002 Stock Option Plan for Non-Employee
Directors (the 2002 Directors Plan). On February 20, 2003, all shares available for grant under
the 1993 Directors Plan were transferred to the 2002 Directors Plan and all subsequent grants
have been made under the 2002 Directors Plan.
All options granted under the 1993 Directors Plan and the 2002 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. Options granted under the 2002 Directors Plan when a director is first
elected to the Board of Directors generally become exercisable ratably on each of the first three
annual shareholders meetings immediately following the date of
grant of the options. Other options
granted under the 1993 Directors Plan and the 2002 Directors Plan become exercisable on the date
of the first annual shareholders meeting immediately following the date of grant of the option.
Options become exercisable on the applicable date provided there has been no interruption of the
optionees service on the Board of Directors before that date and subject to acceleration of
exercisability in the event of the death of the optionee or a change in control as defined in the
plan under which the option was granted.
F-24
A summary of the option activity under the Companys stock option plans for non-employee
directors as of June 30, 2006, and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
Aggregate |
|
|
Number of |
|
Weighted-Average |
|
Remaining |
|
Intrinsic |
|
|
Options |
|
Exercise Price |
|
Contractual Life |
|
Value |
Outstanding at June 30, 2005 |
|
|
630,021 |
|
|
$ |
25.68 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
60,000 |
|
|
|
57.35 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(37,368 |
) |
|
|
12.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
652,653 |
|
|
$ |
29.35 |
|
|
|
5.21 |
|
|
$ |
12,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Grant (2,798,438 authorized) |
|
|
846,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
592,653 |
|
|
$ |
26.52 |
|
|
|
4.79 |
|
|
$ |
12,816 |
|
Available for grant and authorized amounts are for the 2002 Directors Plan only, because as
of June 30, 2003, options are no longer granted to non-employee directors under the 1993 Directors
Plan or any plan other than the 2002 Directors Plan.
Employee Stock Purchase Plan
In accordance with the Companys 1993 Employee Stock Purchase Plan (the Purchase Plan)
employees are offered 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. Shares are offered for purchase under the Purchase Plan in
offering periods generally of six months duration, at a purchase price equal to 85% of the fair
market value of such shares at the beginning of the offering period or at the end of the offering
period, whichever is lower. In November 2005, the Board of Directors adopted an amendment to the
Purchase Plan to increase the number of shares by 1,000,000 bringing the aggregate number of shares
of Common Stock, which may be purchased by employees under the Purchase Plan to 2,518,750. Under
the Purchase Plan, 98,075, 159,620, and 81,708 shares of common stock were purchased during the
years ended June 30, 2006, 2005 and 2004, 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 Companys 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,
2006, warrants for 9,046 shares were outstanding and remain exercisable until July 2009.
F-25
On May 12, 2000, in combination with the issuance of Series G preferred stock, the Company
granted warrants to purchase 288,226 common shares at a price of $9.54 per share. The warrants
vested immediately. In April 2005, all 288,226 warrants were exercised.
In March 2000, the Company issued warrants granting DuPont the right to purchase 1,687,500
shares of Barrs 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.
(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, subject to applicable Internal
Revenue Code limits, including an annual limit on pre-tax contributions of $15 in 2006 ($20 in the
case of participants age 50 or above). The Company is required, pursuant to the terms of its
collective bargaining agreement, to contribute to each union employees account an amount equal to
the 2% minimum contribution made by such employee. The Company may, at its discretion, make
matching employer 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 employees compensation. In fiscal years 2006, 2005
and 2004, the Company chose to make matching employer contributions at the rate of 10% of employee
contributions (other than the higher pre-tax contributions available to participants age 50 and
above). Participants are always fully vested with respect to their own contributions and any
investment return thereon. Participants become fully vested in the Companys contributions and
related earnings after five full years of employment.
The Companys contributions to the 401(k) Plans were $9,089, $7,650 and $6,534 for the years
ended June 30, 2006, 2005 and 2004, respectively.
The Company has a non-qualified plan (Excess Plan) that enables certain executives whose
contributions to the 401(k) Plan are limited by the Internal Revenue Code to defer amounts under
the Excess Plan that they are unable to contribute to the 401(k) Plan as a result of the Internal
Revenue Code limits. The Company credits the executives with the matching employer contributions
they would have received under the 401(k) Plan if the Internal Revenue Code limits did not prevent
them from contributing the amounts deferred under the Excess Plan to the 401(k) Plan. As of June
30, 2006 and 2005, the Company had an asset and matching liability for the Excess Plan of $7,273
and $5,141, 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 Durameds 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 directors life, from the time a
participating director ceased to be a member of the Board, equal to 85% and 60%, respectively, of
the directors most recent annual Board fee, as adjusted annually to reflect changes in the
Consumer Price Index. As of June 30, 2006 and 2005, the Company has recorded $425 and $447,
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.
In October 2003, the Board of Directors approved the Barr Pharmaceuticals, Inc. Non-Qualified
Deferred Compensation Plan (the Plan). The Plan provides certain executives whose contributions
to the 401(k) Plan are limited by the Internal Revenue Code with the opportunity to defer, in whole
or in part, the portion of their salary or bonus for a particular calendar year that they are
unable to defer through the 401(k) Plan or the Excess Plan. (The 401(k) Plan and the Excess Plan
collectively limit an employees deferrals to 60% of salary and
bonus.) Because deferring salary
or bonus under the Plan reduces the matching employer contributions which are credited to the
executives under the Excess Plan, the Company credits the executives under the Plan with the
matching employer contributions they would receive under the Excess Plan if they did not defer
salary or bonus under the Plan. As of June 30, 2006 and 2005, the Company had an asset and matching
liability for the Plan of $512 and $308, respectively.
F-26
(16) Other Income (Expense), Net
A summary of other income (expense), net is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
Proceeds from insurance settlement |
|
$ |
|
|
|
$ |
4,600 |
|
|
$ |
|
|
Gain (loss) in venture funds |
|
|
5,223 |
|
|
|
(796 |
) |
|
|
(1,346 |
) |
Gain on foreign currency option |
|
|
10,300 |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
1,645 |
|
|
|
59 |
|
|
|
(187 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
$ |
17,168 |
|
|
$ |
3,863 |
|
|
$ |
(1,533 |
) |
|
|
|
|
|
|
|
|
|
|
(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
non-cancellable long-term lease commitments as of June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
$ |
4,188 |
|
|
$ |
3,561 |
|
|
$ |
3,464 |
|
|
$ |
3,356 |
|
|
$ |
3,340 |
|
|
$ |
12,825 |
|
Capital leases |
|
|
856 |
|
|
|
204 |
|
|
|
95 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum lease payments |
|
$ |
5,044 |
|
|
$ |
3,765 |
|
|
$ |
3,559 |
|
|
$ |
3,388 |
|
|
$ |
3,340 |
|
|
$ |
12,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 five- and 10-year periods, as defined by each fund. As of June
30, 2006 and June 30, 2005, the Company had invested $6,550 and $5,941, 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, subject to certain renewal provisions.
Product Liability Insurance
The Companys 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 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
F-27
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, 2006, there was approximately
$8,000 of coverage remaining under these policies. The Company has recorded a receivable of $5,590
for legal costs incurred and expected to be recovered under these policies as of June 30, 2006.
Once the coverage from these extended reporting period policies has been exhausted, future legal
and settlement costs will be covered first by a combination of the Companys cash balances and then
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 Companys obligations under such agreements.
In September 2001, Barr filed an ANDA for the generic version of Sanofi-Aventis Allegra®
tablets. Sanofi-Aventis has filed a lawsuit against Barr claiming patent infringement. A trial date
for the patent litigation has not been scheduled. In June 2005, the Company entered into an
agreement with Teva Pharmaceuticals USA, Inc. which allowed Teva to manufacture and launch Tevas
generic version of Allegra during the Companys 180 day exclusivity period, in exchange for Tevas
obligation to pay the Company a specified percentage of Tevas operating profit, as defined, earned
on sales of the product. The agreement between Barr and Teva 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 share of Tevas
operating profit on generic Allegra.
On September 1, 2005, Teva launched its generic version of Allegra. The Company, in
accordance with FASB Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others recorded a liability of $4,057
to reflect the fair value of the indemnification obligation it has undertaken.
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, as defined, of greater than $100,000 over any rolling five-year
period prior to October 22, 2014. As of June 30, 2006, no liability has been accrued related to
this settlement.
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 patent rights, 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 Companys
assessments are based on estimates that the Company, in consultation with outside advisors,
believes are reasonable. Although the
F-28
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, 2006, the Companys reserve for the liability associated with claims or related defense
costs for these matters is not material.
Patent Matters
Desmopressin Acetate Suit
In July 2002, the Company filed an ANDA seeking approval from the U.S. FDA to market
Desmopressin acetate tablets, the generic equivalent of Sanofi-Aventis DDAVP product. The Company
notified Ferring AB, the patent holder, and Sanofi-Aventis pursuant to the provisions of the
Hatch-Waxman Act in October 2002. Ferring AB and Sanofi-Aventis filed a suit in the U.S. 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 AB amended their complaint to add a claim of willful
infringement.
On February 7, 2005, the court granted summary judgment in the Companys favor, which Ferring
AB and Sanofi-Aventis have appealed. On July 5, 2005, the Company launched its generic product. On
February 15, 2006, the Court of Appeals for the Federal Circuit denied their appeal. Ferring AB and
Sanofi-Aventis subsequently filed a petition for rehearing and rehearing en banc, which was denied
on April 10, 2006. On June 15, 2006, the United States Supreme Court granted Ferring AB leave to
file a petition for a writ of certiorari on or before September 9, 2006.
Fexofenadine Hydrochloride Suit
In June 2001, the Company filed an ANDA seeking approval from the FDA to market fexofenadine
hydrochloride tablets in 30 mg, 60 mg and 180 mg strengths, the generic equivalent of
Sanofi-Aventis Allegra tablet products for allergy relief. The Company notified Sanofi-Aventis
pursuant to the provisions of the Hatch-Waxman Act and, in September 2001, Sanofi-Aventis filed a
patent infringement action in the U.S. District Court for the District of New Jersey-Newark
Division, seeking to prevent the Company from marketing this product until after the expiration of
various U.S. patents, the last of which is alleged to expire in 2017.
After the filing of the Companys ANDAs, Sanofi-Aventis listed an additional patent on Allegra
in the Orange Book. The Company filed appropriate amendments to its ANDAs to address the newly
listed patent and, in November 2002, notified Merrell Pharmaceuticals, Inc., the patent holder, and
Sanofi-Aventis pursuant to the provisions of the Hatch-Waxman Act. Sanofi-Aventis filed an amended
complaint in November 2002 claiming that the Companys ANDAs infringe the newly listed patent.
On March 5, 2004, Sanofi-Aventis and AMR Technology, Inc., the holder of certain patents
licensed to Sanofi-Aventis, filed an additional patent infringement action in the U.S. District
Court for the District of New Jersey Newark Division, based on two patents that are not listed in
the Orange Book.
In June 2004, the court granted the Company summary judgment of non-infringement as to two
patents. On March 31, 2005, the court granted the Company summary judgment of invalidity as to a
third patent. Discovery is proceeding on the five remaining patents at issue in the case. No trial
date has been scheduled.
On August 31, 2005, the Company received final FDA approval for its fexofenadine tablet
products. As referenced above, pursuant to the agreement between the Company and Teva, the Company
selectively waived its 180 days of generic exclusivity in favor of Teva, and Teva launched its
generic product on September 1, 2005.
F-29
On September 21, 2005, Sanofi-Aventis filed a motion for a preliminary injunction or expedited
trial. The motion asked the court to enjoin the Company and Teva from marketing their generic
versions of Allegra tablets, 30 mg, 60 mg and 180 mg, or to expedite the trial in the case. The
motion also asked the court to enjoin Ranbaxy Laboratories, Ltd. and Amino Chemicals, Ltd. from the
commercial production of generic fexofenadine raw material. The preliminary injunction hearing
concluded on November 3, 2005. On January 30, 2006, the Court denied the motion by Sanofi-Aventis
for a preliminary injunction or expedited trial. Sanofi-Aventis has appealed the Courts denial of
its motion to the United States Court of Appeals for the Federal Circuit. Briefing in the appeal
has been completed, but no date for argument has been set.
On May 8, 2006, Sanofi-Aventis and AMR Technology, Inc. served a Second Amended and
Supplemental Complaint based on U.S. Patent Nos. 5,581,011 and 5,750,703 (collectively, the API
patents), asserting claims against the Company for infringement of the API (active pharmaceutical
ingredient) patents based on the sale of the Companys fexofenadine product and for inducement of
infringement of the API patents based on the sale of Tevas fexofenadine product. On June 22,
2006, the Company answered the complaint, denied the allegations against it, and asserted
counterclaims for declaratory judgment that the asserted patents are invalid and/or not infringed
and for damages for violations of the Sherman Act, 15 U.S.C. §§ 1.2.
Sanofi-Aventis also has brought a patent infringement suit against Teva in Israel, seeking to
have Teva enjoined from manufacturing generic versions of Allegra tablets and seeking damages.
Product Liability Matters
Hormone Therapy Litigation
The Company has been named as a defendant in approximately 4,950 personal injury product
liability cases brought against the Company and other manufacturers by plaintiffs claiming that
they suffered injuries resulting from the use of certain estrogen and progestin medications
prescribed to treat the symptoms of menopause. The cases against the Company involve the
Companys Cenestin products and/or the use of the Companys 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 a defendant in these cases, fewer than a third of
the complaints actually allege the plaintiffs took a product manufactured by the Company, and the
Companys 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,
approximately 3,100 of such cases have been dismissed (leaving approximately 1,850 pending) and,
based on discussions with the Companys 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.
Antitrust Matters
Ciprofloxacin (Cipro®) 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 (Cipro) from 1997 to the present. The complaints allege that
the 1997 Bayer-Barr patent litigation settlement agreement was anti-competitive and violated
federal antitrust laws and/or state antitrust and consumer protection laws. A prior investigation
of this agreement by the Texas Attorney Generals Office on behalf of a group of state Attorneys
General was closed without further action in December 2001.
The lawsuits include nine consolidated in California state court, one in Kansas state court,
one in Wisconsin state court, one in Florida state court, and two consolidated in New York state
court, with the remainder of the actions pending in the U.S. 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
F-30
the Companys favor and
dismissed all of the federal actions before it. On June 7, 2005, plaintiffs filed notices of appeal
to the U.S. Court of Appeals for the Second Circuit. The Court of Appeals has stayed consideration
of the merits pending consideration of the Companys motion to transfer the appeal to the United
States Court of Appeals for the Federal Circuit as well as plaintiffs request for the appeal to be
considered en banc. Merits briefing has not yet been completed because the proceedings are stayed
pending en banc consideration of a similar case.
On September 19, 2003, the Circuit Court for the County of Milwaukee dismissed the Wisconsin
state class action for failure to state a claim for relief under Wisconsin law. On May 9, 2006, the
Court of Appeals reinstated the complaint on state law grounds for further proceedings in the trial
court, but on July 25, 2006, the Wisconsin Supreme Court granted the defendants petition for
further review and thus the case remains on appeal. 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. An intermediate appellate court affirmed that decision, and plaintiffs have
sought leave to appeal to the New York Court of Appeals. 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.
Tamoxifen Antitrust Class Actions
To
date approximately 33 consumer or third-party payor class action complaints have been filed
in state and federal courts against Zeneca, Inc., AstraZeneca Pharmaceuticals 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. On November 2, 2005, the United States Court of Appeals for the Second
Circuit affirmed the District Courts order dismissing the cases for failure to state a viable
antitrust claim. On November 30, 2005, Plaintiffs petitioned the United States Court of Appeals for
the Second Circuit for a rehearing en banc. The Court of Appeals directed the Company to file a
response to Plaintiffs petition, which the Company submitted on January 26, 2006. The Court has
not yet ruled on the merits of the petition.
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.
Ovcon Antitrust Proceedings
To date, the Company has been named as a co-defendant with Warner Chilcott Holdings, Co. III,
Ltd., and others in complaints filed in federal courts by the Federal Trade Commission, 34 state
Attorneys General and nine private class action plaintiffs claiming to be direct and indirect
purchasers of Ovcon-35®. These actions allege, among other things, that a March 24, 2004 agreement
between the Company and Warner Chilcott (then known as Galen Holdings PLC) constitutes an unfair
method of competition, is anticompetitive and restrains trade in the market for Ovcon-35® and its
generic equivalents. These cases, the first of which was filed by the FTC on or about December 2,
2005, remain at a very early stage, with discovery cut-off dates of December 22, 2006 for the FTC
and state cases and March 2, 2007 for the private cases. No trial dates have been set.
The Company believes that it has not engaged in any improper conduct and is vigorously
defending itself in these matters.
F-31
Provigil Antitrust Proceedings
To date, the Company has been named as a co-defendant with Cephalon, Inc., Mylan Laboratories,
Inc., Teva Pharmaceutical Industries, Ltd., Teva Pharmaceuticals USA, Inc., Ranbaxy Laboratories,
Ltd., and Ranbaxy Pharmaceuticals, Inc. (the Provigil Defendants) in nine separate complaints
filed in the U. S. District Court for the Eastern District of Pennsylvania. These actions allege,
among other things, that the agreements between Cephalon and the other individual Provigil
Defendants to settle patent litigation relating to Provigil® constitute an unfair method of
competition, are anticompetitive and restrain trade in the market for Provigil and its generic
equivalents in violation of the antitrust laws. These cases remain at a very early stage and no
trial dates have been set.
The Company was also named as a co-defendant with the Provigil Defendants in an action filed
in the U. S. District Court for the Eastern District of Pennsylvania by Apotex, Inc.. The lawsuit
alleges, among other things, that Apotex sought to market its own
generic version of Provigil and that the settlement agreements entered into between Cephalon and the other individual
Provigil Defendants constituted an unfair method of competition, are anticompetitive and restrain
trade in the market for Provigil and its generic equivalents in violation of the antitrust laws.
The Company believes that it has not engaged in any improper conduct and is vigorously
defending itself in these matters.
Medicaid Reimbursement Cases
The Company, along with numerous other pharmaceutical companies, have been named as a
defendant in separate actions brought by the states of Alabama, Hawaii, Illinois, Kentucky and
Mississippi, the Commonwealth of Massachusetts, the City of New York, and numerous counties in New
York. 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 Commonwealth of Massachusetts case and the New York cases, with the exception of the
action filed by Erie, Oswego, and Schenectady Counties in New York, are currently pending in the
U.S. District Court for the District of Massachusetts. Discovery is underway in the Massachusetts
cases, but no trial dates have been set. In the consolidated New York cases, motions to dismiss are
under advisement, with no trial dates set. The Erie, Oswego, and Schenectady County cases are
pending in state courts in New York, again with no trial dates set.
The Alabama case was filed in Alabama state court, removed to the U.S. District Court for the
Middle District of Alabama, and returned to state court. Discovery is underway, but no trial date
has been set. The State of Hawaii case was filed in state court in Hawaii on April 26, 2006. This
matter is at a very early stage with no trial date set as of yet. The Illinois and Kentucky cases
were filed in Illinois and Kentucky state courts, removed to federal court, and then remanded back
to their respective state courts. No trial dates have been set. The State of Mississippi case was
filed in state court. Discovery is underway, but no trial date has been set.
The Company believes that it has not engaged in any improper conduct and is vigorously
defending itself in these matters.
F-32
Breach of Contract Action
On October 6, 2005, plaintiffs Agvar Chemicals Inc., Ranbaxy Laboratories, Inc. and Ranbaxy
Pharmaceuticals, Inc. filed suit against the Company and Teva Pharmaceuticals USA, Inc. in the
Superior Court of New Jersey. In their complaint, plaintiffs seek to recover damages and other
relief, based on an alleged breach of an alleged contract requiring the Company to purchase raw
material for the Companys generic Allegra product from Ranbaxy, prohibiting the Company from
launching its generic Allegra product without Ranbaxys consent and prohibiting the Company from
entering into an agreement authorizing Teva to launch Tevas generic Allegra product. The court
has entered a scheduling order providing for the completion of discovery by March 7, 2007 but has
not yet set a date for trial. The Company believes there was no such contract and is vigorously
defending this matter.
Other Litigation
As of June 30, 2006, 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 other matters
will not have a material adverse effect on the Companys consolidated financial statements.
Government Inquiries
On July 11, 2006, the Company received a request from the FTC for the voluntary submission of
information regarding the settlement agreement reached in the matter of Cephalon, Inc. v. Mylan
Pharmaceuticals, Inc., et al., U.S. District Court for the District of New Jersey. The FTC is
investigating whether the Company and the other parties to the litigation have engaged in unfair
methods of competition in violation of Section 5 of the Federal Trade Commission Act by restricting
the sale of Modafinil products. In its request letter, the FTC stated that neither the request nor
the existence of an investigation indicated that Barr or any other company had violated the law.
The Company believes that its settlement agreement is in compliance with all applicable laws and
intends to cooperate with the FTC in this matter.
(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. Ciprofloxacin is an example of a distributed product that is included in the
generic pharmaceuticals segment.
In fiscal year 2006, three customers accounted for 27%, 15% and 11% of generic sales. 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.
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. Barrs 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.
F-33
In fiscal year 2006, three customers accounted for 27%, 13% and 9% of proprietary product
sales. In fiscal year 2005, three customers accounted for 25%, 18% and 10% of proprietary product
sales. In fiscal year 2004, three customers accounted for 21%, 20% and 15% of proprietary product
sales.
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 product sales
and gross profit information for the Companys operating segments consisted of the following:
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Product |
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2006 |
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% of sales |
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2005 |
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% of sales |
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2004 |
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% of sales |
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Product sales: |
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Proprietary |
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$ |
329,858 |
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|
28 |
% |
|
$ |
278,786 |
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27 |
% |
|
$ |
146,087 |
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|
|
11 |
% |
Generic |
|
|
838,820 |
|
|
|
72 |
% |
|
|
751,388 |
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|
|
73 |
% |
|
|
1,150,622 |
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|
89 |
% |
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Total product sales |
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$ |
1,168,678 |
|
|
|
100 |
% |
|
$ |
1,030,174 |
|
|
|
100 |
% |
|
$ |
1,296,709 |
|
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|
100 |
% |
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Gross profit: |
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Margin % |
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Margin % |
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|
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|
|
Margin % |
Proprietary |
|
$ |
263,672 |
|
|
|
80 |
% |
|
$ |
239,516 |
|
|
|
86 |
% |
|
$ |
117,994 |
|
|
|
81 |
% |
Generic |
|
|
552,888 |
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|
|
66 |
% |
|
|
486,578 |
|
|
|
65 |
% |
|
|
545,970 |
|
|
|
47 |
% |
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Total gross profit |
|
$ |
816,560 |
|
|
|
70 |
% |
|
$ |
726,094 |
|
|
|
70 |
% |
|
$ |
663,964 |
|
|
|
51 |
% |
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(19) Subsequent Events (unaudited);
Proposed
PLIVA Acquisition
On
June 27, 2006, the Company announced that the Supervisory Board
of PLIVA, a generic pharmaceutical company with revenues of
approximately $1,200,000, headquartered in Zagreb, Croatia, had endorsed its proposal to make a tender
offer to PLIVAs shareholders to purchase 100% of the shares of PLIVA. On July 28, 2006, in
accordance with the law of the Republic of Croatia governing tender offers, the Companys newly
formed European subsidiary, Barr Laboratories Europe B.V., officially filed its tender offer with
the Croatian Financial Services Supervisory Agency
(HANFA). Under the terms of the $2,300,000 cash tender offer, PLIVA shareholders who tender their shares will receive HRK
743 per share in cash. In addition, shareholders that are registered as shareholders at the Central
Depository Agency as of August 22, 2006 will receive the dividend of HRK 12 per share, for a total
cash consideration of HRK 755 per share. On August 10, 2006, HANFA approved the
Companys tender offer for publication. If the Company is successful in the
tender process, it expects the acquisition to close in
October or November, 2006.
Senior Credit Facility
On July 21, 2006, the Company entered into an unsecured Senior Credit Facility (the Credit
Facility) pursuant to which the lenders will provide the borrower with an
aggregate amount not to exceed $2,800,000. Of such amount, $2,000,000 is in the form of a five-year
term facility, $500,000 is in the form of a 364-day term facility (collectively the term facilities) and $300,000 is in the form of a five-year revolving credit
facility. The $2,500,000 of term facilities, which bear interest at LIBOR plus 75
basis points, may be drawn only in connection with, if consummated,
the Companys proposed acquisition of PLIVA and for the
refinancing of certain indebtedness. The Credit Facility includes customary covenants for
agreements of this kind, including financial covenants limiting the total indebtedness of the
Company on a consolidated basis.
Shire Product Acquisition, Development and Settlement Agreements
On August 14, 2006, Duramed, Shire LLC and Shire Development, Inc. entered into a product
development and licensing agreement and an acquisition agreement for ADDERALL® (immediate-release mixed amphetamine salts) tablets
and that Barr
Laboratories entered into a settlement and license agreement relating to the resolution of two
pending patent cases
F-34
involving Shires ADDERALL XR®.
The agreements have been submitted
to the FTC as required by law and become effective upon the courts signing of consent
judgments in the two pending cases.
The product acquisition agreement provides for Duramed to purchase Shires ADDERALL
(immediate-release mixed amphetamine salts) tablets for $63,000. This agreement is
subject to reporting under the United States Hart-Scott-Rodino Act.
In a separate development agreement, Duramed has granted Shire a license to obtain regulatory
approval for and market in certain specified territories Durameds recently approved
SEASONIQUE (levonorgestrel/ethinyl estradiol tablets 0.15 mg/0.03 mg and ethinyl
estradiol tablets 0.01 mg) extended-cycle oral contraceptive product and five products in various
stages of development utilizing Durameds transvaginal ring technology. Shire has agreed to make an
initial $25,000 payment and will reimburse Duramed for development expenses incurred going forward
up to a maximum of $140,000 over an eight year period, not to exceed $30,000 per year.
The settlement and license agreements permit Barr to launch a generic version of ADDERALL XR,
under terms of a license commencing on April 1, 2009, more than nine years earlier than the
last-to-expire Shire patent listed in the U.S. FDA Orange Book, or earlier under certain
circumstances such as the launch of another partys generic version of ADDERALL XR. The license
will be exclusive for the first 180-days following Barrs launch. Barr will pay Shire a royalty
equal to a portion of profits generated from the sales of generic ADDERALL XR during the time that
Barr is the only generic manufacturer marketing a generic version of ADDERALL XR. As part of the
settlement, Barr admits that Shires patents are valid and enforceable and that Barrs generic
product infringes one of the Shire patents.
F-35
(20) Quarterly Data (Unaudited)
A summary of the quarterly results of operations is as follows:
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Three Month Period Ended |
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Sept. 30 |
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Dec. 31 |
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Mar. 31 |
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Jun. 30 |
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FISCAL YEAR 2006: |
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|
|
|
|
|
|
|
Total revenues |
|
$ |
310,439 |
|
|
$ |
325,517 |
|
|
$ |
326,841 |
|
|
$ |
351,668 |
|
Cost of sales |
|
|
80,062 |
|
|
|
83,732 |
|
|
|
89,642 |
|
|
|
98,682 |
|
Net earnings |
|
|
83,243 |
|
|
|
94,884 |
|
|
|
76,096 |
|
|
|
82,254 |
|
Earnings per
common share basic (1) |
|
$ |
0.80 |
|
|
$ |
0.91 |
|
|
$ |
0.72 |
|
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share diluted (1) |
|
$ |
0.78 |
|
|
$ |
0.88 |
|
|
$ |
0.70 |
|
|
$ |
0.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRICE RANGE OF COMMON STOCK |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
55.08 |
|
|
$ |
63.60 |
|
|
$ |
70.25 |
|
|
$ |
64.51 |
|
Low |
|
$ |
45.00 |
|
|
$ |
53.53 |
|
|
$ |
60.83 |
|
|
$ |
47.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 basic (1) |
|
$ |
0.50 |
|
|
$ |
0.58 |
|
|
$ |
0.60 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
(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 two most
recent fiscal years, the Company did not pay any cash dividends. |
F-36
SCHEDULE II
BARR PHARMACEUTICALS, INC.
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Additions, |
|
|
|
|
|
|
Beginning |
|
Costs and |
|
Deductions, |
|
Balance at |
(In thousands) |
|
of Year |
|
Expenses |
|
Write-offs |
|
End of Year |
Accounts
receivable reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2004 |
|
|
134,653 |
|
|
|
460,665 |
|
|
|
(456,853 |
) |
|
|
138,465 |
|
Year Ended June 30, 2005 |
|
|
138,465 |
|
|
|
559,786 |
|
|
|
(555,767 |
) |
|
|
142,484 |
|
Year Ended June 30, 2006 |
|
|
142,484 |
|
|
|
646,844 |
|
|
|
(652,031 |
) |
|
|
137,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Year Ended June 30, 2006 |
|
|
13,415 |
|
|
|
21,185 |
|
|
|
(9,879 |
) |
|
|
24,721 |
|
F-37